While we’ve enjoyed several years of equity markets rebounding from the lows after the financial crisis, before we start to get too complacent, it is a good time to review and consider what it means to be a smart investor. If the past has taught us anything, it is that in times of choppy or declining financial markets, rational and savvy investment decisions often get lost in the fear and panic of the moment. Following these few key points can help you avoid making poor investment decisions and become a smarter investor.
- Know Your Risk Tolerance: Prior to making any investment, you should know how much risk you are prepared to accept. All investments carry some type of risk. If making a specific investment makes you significantly uncomfortable, or keeps you up at night, then you probably need to rethink it. Anything that has the potential to increase considerably, also carries the same potential to decrease significantly. If this happened, would it seriously jeopardize your financial plans?
- Monitor Your Investment Results Regularly: If some of your investments are underperforming relative to similar investments and the rest of your portfolio, learn the reason why and make any necessary adjustments. Don’t be afraid to sell an investment if the facts have changed, or hang on to it hoping for the best. Consider the opportunity cost of not reinvesting that money into something that has a greater potential to improve your portfolio. Always set realistic long term return expectations.
- Diversify: “Don’t put all your eggs in one basket”. Translated this means don’t put all your money into one investment or one type of investment. Instead hold different types of investments within each type of asset class (i.e. different industry sectors, geographic areas, company sizes). Different types of investments perform well or poorly at different times, and it’s almost always impossible to predict when. Have the right mix, appropriate for your risk tolerance and objectives, to mitigate your risks and improve your long term performance. Consider top professional portfolio managers who have teams to do this for you 24/7.
- Take Emotion out of the Equation: Many investors sustain losses or miss opportunities due to fear, panic or unbridled enthusiasm. Try not to be caught up with the crowd when making investment decisions. Don’t buy or sell just because everyone else is. For most investors, it is almost impossible to time the market and those that attempt it typically buy and sell at the wrong time. The bottom line here is to make sure your investment decisions are rational and logical and not emotional.
- Develop a Sound Plan, and then be Patient: Portfolios built using these strategies, and taking your own specific objectives and risk tolerance into account, do find that in the long run it will prove effective at accomplishing your goals. This still means that you need to review it regularly in case it requires rebalancing, minor tweaking, or major adjustments to incorporate important changes or new opportunities. However, you need to stick to the plan, and resist the temptation to fiddle or lose faith.
- Practice Risk Management: Develop a risk management strategy that will ensure your money continues to grow for the future in case of a health crisis or other insurable event. Maintain an emergency fund, and check that you have sufficient insurance coverage to protect against this very real possibility. Don’t jeopardize you and your family’s future plans, when there are ways to prevent this.
- Seek Professional Advice: Besides using professional portfolio managers, consider a Certified Financial Planner who understands your complete financial situation, and will work with you not just now, but throughout your life, to define your objectives and risk tolerance, and help you design and implement a plan to ensure you reach your goals. Life, health, and financial changes constantly happen, so working with a professional will make sure your goals stay on track.
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