Everyone is looking for an easy way to get ahead - especially when it comes to Stock Market investing. Everyone wants to know how they can move toward financial freedom with little effort on their part. Well, there are no secrets out there - just hard work and dedication toward your money! You have to plan where you want to go and then work your plan. But there are some things you can do to reduce the effects of risk on your portfolio.
1) Never put all your eggs in one basket.
Some people think it's good to have all their money invested in only one type of security, such as stocks that pay dividends or growth stocks. The opposite is true! Instead, it would help if you had a portion of your money in each investment type so that the market fluctuations don't affect your entire portfolio.
2) Diversify within asset classes.
Diversification is important!! Although that doesn't mean you need to buy 100 stocks! You can still invest in mutual funds or exchange-traded funds (ETFs) that invest in various securities within a single asset class. Remember, diversification minimizes the risk of catastrophic loss, and it allows you to take full advantage of different types of investments. You can even buy one mutual fund that covers many different industries without having to spend your life researching all those stocks!
3) Spread out your purchases.
When you buy or sell securities, you need to decide when it's the right time to do so. Many people mistake buying all their shares in one security at once. Instead, they should gradually purchase more shares over time, known as dollar cost averaging . Another strategy is to divide your investment dollars among several stocks or funds.
4) Rebalance, don't react.
Keep your portfolio balanced between stocks, fixed income and other investments. But instead of making decisions based on the fluctuations in the market, rebalance your account when certain events happen - like once a year or when one asset class grows too large compared with other classes in your portfolio.
5) Know your goals.
When you know what you're saving for, you can develop a plan that takes different market conditions into account. For example, if you have set a goal to retire in 10 years, your investment strategy may be different from someone just trying to accumulate assets within their retirement plan.
6) Keep your eyes on the prize.
1 of the most collosal errors you could potentially make is buy a stock and then run a screen every day to see how it's doing! More time spent looking at your investments, means you are that much more likely you to panic when things start going bad - and that leads to poor decisions. As long as your strategy is sound and you have a set plan, then don't look at your portfolio every day. Remember, the market will fluctuate - so take a long-term view of your money.
By following these simple guidelines, you'll never have to worry about what the stock market does from one day to the next. Sleeping will be much easier each night knowing that your money is working for you, no matter how it performs in the short term.
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I think that risk management can be important, but it isn't for everyone. And I have to disagree on some points you made.
For example, diversification: Yes, this is usually a good thing, but if you know what you are doing and have done some great research, it could be better to focus on a few investments, than diversify into many different assets and even within the assets in different places. Take a look at Warren Buffet: For the size of his portfolio, he has very few big positions. Diversification helps to get average results and lower volatility, focus in a field you truly understand, helps to get better results.
Rebalance is something I think is even more ovrrated. Usually it means: Sell your winners, buy more of the loosers. Why should I do this? If you look to the stock market and you own stocks of striving businesses, that made a lot of gains on the on hand, and on the other you have companies, that really aren't great anymore or even face major threats, you wouldn't invest in the loosers, just because they do have a lower ratio in your portfolio. Take an extreme example: You own stocks of Nvidia and Deutsche Bank. In the beginning you had 50/50 and kept it for a time of let's say a few years. It is most likely that Nvidia is completely outweighing Deutsche Bank. Why would you sell your Nvidia stocks to buy Deutsche Bank? Doesn't make any sense to me. And in this environment I don't see a reason, why I should buy bonds at all.
If you have the choice studies show, that time in the market is better than timing the market. Most people have no choice, because they invest money they earn - and you can just invest what is left, after you daily expenses. But if you have a lot of money, and no psychological problems with volatility, it might be better to invest directly, than to wait. Except if you're in a bear market or the end of a bull market - but that is usually hard to say. Dollar cost average effect is mostly a psychological thing. It can be helpful in some cases, but you never know the future - and cash is trash. Except for the money you really need to cover your expenses.
Still, the points I made do have some limiting factors. They aren't for anyone. Focusing on few assets within a class can be very challenging - and if you are not an expert it is quite difficult to find the best of the best.
Rebalancing can be good, if your goal is to keep volatility low or you want to do some turn aroud strategies.
And most of the strategies you mentioned help to keep volatility lower.
Even I disagree on some points, I still appreciate your work! Keep it up!
Cheers,
@andy-plays
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I did a 100$ charles schwab investment later year and made 158$ so far. Took a bit to find good stocks though.
Some solid principles. The thing is, they really do work... and should be practiced. Wherever success exists, so does discipline. No different when it comes to investing.
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