Whether you are investing for the very first time or you want to analyze the vitality of an existing portfolio, you will need to understand a few basic principles.
So, what should every investor know before they take the plunge?
1. Risk is about more than tolerance
Our industry loves fancy words and jargon. We toss around investment terms like risk tolerance, asset allocation, beta, passive investing and other phrases because we think we sound smart.
Maybe we are smart, but if client’s don’t understand these things, then it makes us incomprehensible.
The most common concepts around risk revolve around these ideas:
The amount of risk you are comfortable with has as much to do with your personality as it does with your financial circumstances.
2. Diversification is critical
It cannot be said enough: putting all of your eggs in one basket is never a good idea. Even if your circumstances allow you to take on a lot of risk, you should still diversify your portfolio to protect against catastrophic losses.
3. More mutual funds don’t mean more diversification
Generally, when new investors hear the word “diversification,” they immediately look to mutual funds. While they are a great way to start bringing greater diversity into your portfolio, not all mutual funds are created equal.
4. Rebalancing keeps you on point
Knowing when to buy or sell stock is tricky, but important nonetheless. For example, let’s say your portfolio is initially valued at £50K, with 40% invested in US stocks, 30% bonds, 20% international stocks, and 10% cash. Suppose the stocks fall by 5%, causing the other areas to adjust. Now you are at 35%, 33%, 21% and 11%. Should you rebalance?
5. Monitoring vs. Managing
While you should never make rash decisions with your investments, it is also not wise to simply set it and forget it. This is why you should monitor your portfolio instead of managing your funds.
Monitoring your portfolio means keeping an eye on how your investments are doing. This is vital for any investment plan, even if you have no intention of making any investments in the immediate future. Monitoring allows you to check in on a regular basis to see what changes need to be made. It takes away the emotionality involved in the ups and downs of the market because you only make changes based on your defined parameters. Monitoring is strategic.
Managing your portfolio, on the other hand, implies that you are actively making changes and trades in the account. This method is more tactical requires more account activity. Managing a portfolio is also reactionary to market whims and creates additional fees for any purchases or sells, making it more costly as well.
I am an Independent Financial and Mortgage Adviser and have worked in Financial Services for over 12 years. During my career I gained experience in assisting both individual and corporate clients.…
