How should you handle your investment portfolio?
If there were a definitive answer to that question, you’d hardly need a book or a broker to help you. Unfortunately, investing is both art and science. If you’re an experienced investor, the concepts discussed below are probably old news; you can safely skip them. For others, following these general principles will help you set up a strong investing foundation, and give you the best chance of success.
In the words of any grandmother who’s ever roamed the earth, “Don’t put all your eggs in one basket.” As true in investing as it is in egg gathering. It’s well established by research and history that investors who spread their money across a range of investments do better than those who concentrate it in one company, industry or asset class (such as stocks, bonds, or real estate).
The easiest way to achieve diversification is to invest in a mutual fund or an exchange-traded fund (ETF). ETFs trade throughout the day like individual company stock, but are pooled investment funds that invest across a range of companies and assets. Mutual funds are also pooled investments, but they trade once daily, at the end of the trading day. Some ETFs and mutual funds, like those that track the S&P 500 index, are broadly diversified; others are concentrated in a particular industry, like technology, or a particular asset, like gold or real estate.
Buy Low, Sell High
Few investing concepts are easier to understand and harder to follow. Emotions are the poison of good investing. A good investment plan incorporates a method for rebalancing your investment portfolio at certain time intervals, or when a portion of your portfolio grows too large.
Protect yourself from your own worst impulses by devising an investing plan that follows strict guidelines. That can mean buying or selling a stock based on certain thresholds (buy when it drops 10 percent, sell when it increases 25 percent) or after a certain period of time. It also helps to understand your own tolerance for risk before making an investment.
If you’re the anxious type, investing in a stock that’s likely to be volatile (like a technology startup), increases the likelihood that you’ll panic and sell too soon, particularly if the stock drops drastically. Also, avoid “hot” stocks. In general, companies that are “diseased,” but “curable” offer better prospects for high returns than those that are held in favor by everyone with a few dollars to invest. Think Apple at the beginning of 2000 ($26 a share), rather than Apple at the start of 2012 ($456).
Look into a ‛Target’ or ‛Age-Based’ Fund
For those who really like to “set it and forget it,” many mutual fund companies offer funds that change their allocation based on your current age and, therefore, years to retirement age. Over time, the funds typically decrease holding of stocks in favor of less volatile investments like bonds, inflation-protected securities and the least volatile of them all: cash. Just make sure to pick a fund that isn’t loaded with pricey fees.