Building a Great Investment Portfolio - Three Golden Rules for Success
Are you a do-it-yourself investor who wants to build a great investment portfolio to achieve your financial goals? The good news is that, with all of the products available in today's financial marketplace, it's easier than ever to be a do-it-yourself investor. However, before you begin setting up your portfolio, there are three fundamental rules that you need to bear in mind in order to make sure you stay on the right track.
The first rule is to make sure your portfolio is properly diversified, to avoid putting all your eggs in one basket. For the average investor, that means that your portfolio should contain a combination of stock investments as well as bond investments. Having both stocks and bonds in your portfolio will help ensure that, in the event of turmoil in financial markets, some parts of your portfolio will do well even as others do poorly. In investment theory, it has been shown that stocks and bonds often tend to behave inversely to each other, with one doing well when the other does poorly. For example, during the recent financial crisis in 2008-09, stocks did relatively poorly but bonds did well. Including both asset classes in your portfolio helps avoid sharp swings in your portfolio's value.
The second rule is to avoid chasing so-called hot investments. Often, you hear people in the media touting a certain investment that has been producing stellar returns, say 75% over the past 12 months. While it can be difficult to resist such eye-popping returns, it's been shown that a strategy of chasing last year's winners is a losing strategy over the long term. More often than not, last year's winners end up providing mediocre or poor returns afterward, as the intense competition in financial markets makes it difficult to sustain such performance for more than a short time.
The final rule is not to try to time the market. When one asset class is doing poorly, many investors decide to sell their investments in that asset class and either purchase investments in another asset class or keep their holdings in cash. For example, during the recent financial crisis, after stocks had lost a lot of their value in 2008, many investors sold their stock investments in early 2009 and kept their holdings in cash. That decision turned out to be very costly, as stocks began to rise in March 2009 and ended up regaining much of the value they had lost. Those investors who had tried to time the market and sit on the sidelines missed out on that major rally and their portfolios suffered as a result. The lesson to be learned from that experience is that you should maintain your portfolio's basic structure regardless of the direction of the market.
In summary, if you want a portfolio that will help you reach your financial goals, always remember: Stay diversified, don't chase last year's winners and don't try to time the market. Happy investing!
For more great articles by Robert Winter go to Advice for your investments.
This article was first published as Building a Great Investment Portfolio - Three Golden Rules for Success.
The first rule is to make sure your portfolio is properly diversified, to avoid putting all your eggs in one basket. For the average investor, that means that your portfolio should contain a combination of stock investments as well as bond investments. Having both stocks and bonds in your portfolio will help ensure that, in the event of turmoil in financial markets, some parts of your portfolio will do well even as others do poorly. In investment theory, it has been shown that stocks and bonds often tend to behave inversely to each other, with one doing well when the other does poorly. For example, during the recent financial crisis in 2008-09, stocks did relatively poorly but bonds did well. Including both asset classes in your portfolio helps avoid sharp swings in your portfolio's value.
The second rule is to avoid chasing so-called hot investments. Often, you hear people in the media touting a certain investment that has been producing stellar returns, say 75% over the past 12 months. While it can be difficult to resist such eye-popping returns, it's been shown that a strategy of chasing last year's winners is a losing strategy over the long term. More often than not, last year's winners end up providing mediocre or poor returns afterward, as the intense competition in financial markets makes it difficult to sustain such performance for more than a short time.
The final rule is not to try to time the market. When one asset class is doing poorly, many investors decide to sell their investments in that asset class and either purchase investments in another asset class or keep their holdings in cash. For example, during the recent financial crisis, after stocks had lost a lot of their value in 2008, many investors sold their stock investments in early 2009 and kept their holdings in cash. That decision turned out to be very costly, as stocks began to rise in March 2009 and ended up regaining much of the value they had lost. Those investors who had tried to time the market and sit on the sidelines missed out on that major rally and their portfolios suffered as a result. The lesson to be learned from that experience is that you should maintain your portfolio's basic structure regardless of the direction of the market.
In summary, if you want a portfolio that will help you reach your financial goals, always remember: Stay diversified, don't chase last year's winners and don't try to time the market. Happy investing!
For more great articles by Robert Winter go to Advice for your investments.
This article was first published as Building a Great Investment Portfolio - Three Golden Rules for Success.
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