Investing doesn’t have to be complicated. If you have a plan and process, you can reach your goals sooner rather than later. How will you decide where to invest your hard earned money?
In order to build an investment portfolio, you will need to select the right investments for your situation. This begins with having the right investment mix. Most successful investors own a combination of stocks, bonds, alternative investments, and cash. Later on, I will show you how to decide on that mix.
When you look at investing, there are really only five choices.
Here’s a look at the classes of assets you’ll generally be considering when you invest:
- Start or Operate a Company: Selling a product or service that meets the needs of the marketplace can be the fastest path to financial freedom. However, this can also be the riskiest and least likely to succeed when you evaluate your choices.
- Stocks: Although past performance is no guarantee of future results, stocks have historically provided a higher average annual rate of return than other investments, including bonds and cash equivalents. However, stocks are generally more volatile than bonds or cash equivalents. Investing in stocks may be appropriate if your investment goals are long-term.
- Bonds: Historically less volatile than stocks, bonds do not provide as much opportunity for growth as stocks do. When interest rates rise, bond values tend to fall, and when interest rates fall, bond values tend to rise. Because bonds offer fixed interest payments at regular intervals, they may be appropriate if you want regular income from your investments.
- Cash Equivalents: Cash equivalents (or short-term instruments) such as money market funds offer a lower potential for growth than other types of assets but are the least volatile. They are subject to inflation risk, the chance that returns won’t outpace rising prices. They provide easier access to funds than longer-term investments and may be appropriate if your investment goals are short-term.
- Alternative Assets: The term “alternative assets” is highly flexible and is used to describe specific physical assets, such as natural resources, gold, silver, and real estate, as well as methods of investing, such as hedge funds and private equity. In some cases, even geographic regions, such as emerging global markets, are considered alternative assets. These are often investments that are unrelated to other asset types.
I believe in owning some of every asset class. Being diversified allows you to profit in many areas while not depending too much on any one particular area. This also protects you in times like we saw during the tech (2001-2003) and the real estate and financial (2007-2008) collapses.
Regardless of how the markets may perform, consider making the following part of your investment philosophy:
1. Diversification: They say, “don’t put all your eggs in one basket” and this is priceless advice when it comes to investing. In a bear (falling market) or bull (rising market), certain asset classes may perform better than others. If your assets are mostly held in one type of investment vehicle like mutual funds or mostly in safe havens like CDs or money market accounts, you could be hit hard by stock market losses, or alternately lose out on potential gains that other kinds of investments may be experiencing. So each investment has both an opportunity cost as well as risk.
This is why asset allocation strategies are used in portfolio management. It is important to make sure your portfolio matches your goals, tolerance for risk, and liquidity needs. Asset allocation is about assigning a percentage of your assets to different classes of investments. Diversification, on the other hand is about spreading out your risk within each asset class. For example owning stocks in many sectors (i.e. energy, health care, technology, etc.), of many sizes (small, mid, and large cap stocks), and in various countries (U.S. and foreign stocks).
2. Patience: Impatient investors obsess on the day-to-day doings of the stock market, which can quickly get you off track. Unless you are a trader trying to exploit short-term fluctuations in value, it is often better served having your serious money invested in a solid, long-term strategy. Short-term investing methods might seem fun and exciting if you like to micromanage, but they could add stress and anxiety to your life, and they may be a poor alternative to a long-range investment strategy built around your life goals.
3. Consistency: There are few short cuts in life and getting “rich quick” is not one of them! Most people invest a little at a time, within their budget, and with regularity. That is how you build true wealth over time. Whether you invest $50, $100 or more per month in your 401(k), IRA, Roth, or some other similar investment vehicle. Consistent saving over time is one of the surest ways to build a solid nest egg for your future.
Make sure to utilize payroll deductions and other automatic withdrawals to put your investment saving plan on autopilot. “Out of sight, out of mind” helps you take money you might otherwise spend and direct it toward your future. This will help you build wealth for retirement and for your long-range goals. Investing regularly (and earlier in life) helps you to take advantage of the power of compounding as well.
Take action: If you are a do-it-yourself investor, check out our resources at Wall St. Renegade. If you would like to get a professional opinion on your current portfolio strategy, go to FaithBasedInvestor.com or call 866-594-9919 to set up a FREE 30-minute consultation.