An investor never suffers from an advice drought. A wealth of advice is available anytime on the Internet, as well as on TV and in magazines and newspapers. Very often, the information is heavy on market and economic detail, but light on important principles that can make a difference in your portfolio’s long-term growth. The following rules focus on the important principle category.
Create a financial plan and follow it
Answering these questions will help you determine a general plan for the structure of your portfolio. For example, you may plan to use your investments for your children’s education 12 years from now. The long time frame may let you feel comfortable concentrating on equities, which offer superior potential for long-term growth, despite their high short-term volatility.
Or, you may want to retire in five years. With the need to start tapping your investments relatively soon, you could decide to emphasize fixed-income and cash investments because their values are generally more stable than equity values.
Diversify and maintain your planned asset mix
Investing always involves some degree of risk. You may profit greatly if you happen to invest heavily in an asset type or market sector that thrives; you may also experience large losses. To limit your downside risk, follow an investor’s most important rule: Diversify your investments broadly among and within asset types. And take care to avoid overlaps if you own a basket of funds.
Take our Asset Allocation Quiz to get a suggested allocation for your investment dollars.
After initially planning your asset mix, you will need to make occasional adjustments as your situation or investment conditions change. The market values of your investments will shift over time, which can alter your portfolio’s proportions. Periodic portfolio rebalancing is essential if you want to maintain your planned asset mix.
Think long term and don’t market time
Focusing on short-term market volatility and reacting to it is speculating — not investing. The stock and bond markets have a long history of gains over long holding periods. To take advantage of that upward trend, your portfolio needs time. So, it’s important to think long term and avoid frequent portfolio shifts.
Stay alert to investment developments, but be wary of market timing behavior, such as moving into or out of an asset class or fund as you follow performance news. After all, if professional investors — with all of their resources and experience — find it difficult to achieve consistent success at timing market changes, what chance do you have of calling market turns correctly and repeatedly?
Avoid emotional buying and selling
Basing your investment decisions on feelings is a reliable formula for buying high and selling low. Because admitting failure is never a pleasant experience, your emotions may tell you to hold on when it’s time to sell an investment that has taken a serious wrong turn. Similarly, an emotional focus on not being left out may convince you to buy at a high price as if a growth trend has no end. Making fact-based investment decisions is not always easy, but it is essential for long-term investment success.
Get expert help
Creating an appropriate investment plan and selecting good funds and/or individual securities to carry it out is not easy. I’ve found that most individuals would prefer to have someone else make those decisions for them. The good news is – I can help. You can have your investments managed by the investment professionals at COUNTRY Trust Bank®, no matter where you’re starting from. It’s just one more way that COUNTRY helps you achieve financial security.
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