6 Rules for Selecting Investments
Proven Methods For Investing To Manage Your Assts, Reduce Risk, and Earn Profits
If you are looking for proven methods for investing, you have likely searched online, headed to the bookstore or have asked your friends and family. With the tremendous amount of financial information available about investing out there, it can be overwhelming and challenging to decipher which suggestions are best suited for your personal situation. To simplify the process, follow the six general rules outlined below.
- Diversify- You have likely heard that putting all of your eggs into a single basket is never a good idea, and nothing could be truer than this statement when it comes to your personal investment portfolio. Keep in mind that diversification is more than just placing your investments into more than one stock.
- The Less Volatile the Portfolio, the Higher the Compound Return- Even if two portfolios have the same average rate of return, the less volatile of the two will produce a higher rate of return over time. To accomplish this, choose investments which don’t move together as markets fluctuate. While you cannot eliminate volatility within a portfolio, you can minimize its effects on your overall, annual returns.
- Employ Asset Class Investing- Leverage asset classes to capture market value. Asset classes refer to investments which have more or less similar risk and return characteristics. When leveraging this approach, investors will utilize a disciplined, consistent, long term investment approach. This is a more successful approach than the more favoured “picking and timing” approach used by many investors.
- Global Diversification Can Reduce Risk- The world’s financial markets are changing and evolving. They are growing at incredible speeds. During some years, the US financial markets outperform foreign markets. In other years, foreign markets outperform foreign markets. Therefore, by investing into both markets is an effective method for taking advantage of these price movements. Even though foreign markets are considered more risky than domestic, adding them to your overall investment portfolio can in fact reduce the risk of losses in any one particular countries’ market.
- Design Efficient Portfolios- To design efficient portfolios, you must decide both which investments to purchase and how much of each to purchase. Modern Portfolio Theory provides the direction needed when determining the optimal portfolio balance within each asset class contained in your investment portfolio. This theory uses a mathematical approach built upon the premise that for each level of risk, there is an optimal combination of investments which will provide a maximum return.
- Manage your Equity Losses by Using Limits that Trigger Restructuring- In a down market, create limits which will trigger the need to restructure your portfolio. Whenever these limits are reached, equities will be sold within your portfolio and the funds will be moved into cash equivalents.