“Keep your friends close and your enemies closer” is one of the most famous lines from the movie The Godfather II. On the same lines, “keep your investments close and prospects even closer”!! This means that as an investor, you should not only balance, re-balance, and review your investments, but also keep an eye on underperforming assets or new avenues that can bloom in the long-run.
Many investors don’t invest because it seems overly complicated. But if you want to build wealth in the long-run, investing now has been the easiest way to do so—and anyone can do it. So, let’s do it.
Let’s understand how to build a strong and balanced portfolio.
As an investor, you should know the reason behind your investments. Your purpose could be very personal like saving for your retirement or your child’s education or buying a house or travelling the world. The purpose of your investments may be to fulfil your personal responsibilities or to start your own business, or any other dreams that you may have.
Inculcate discipline in investing! Know how a disciplined investment can help you in wealth creation. Read here.
As an investor, you should know how much risk you can take in your investments. So, before you pick an asset, you should assess your risk-taking ability. Generally, the risk profiles range from conservative (seeking low-risk avenues) to aggressive (able to tolerate high-risk). High-risk assets like stocks or equities may have the potential for high returns, but high losses. Ideally, your risk appetite will depend on your current age and financial responsibilities.
One thing you should note that the reward for taking risks can give the potential return on your investments. If you have a financial goal with a long-term horizon, you are likely to make more money by strategically investing in assets with greater risk. On the other hand, investing in fixed instruments may be reasonable for short-term goals.
Now, when you have your purpose in place, you should explore investments that will help you to reap good benefits. Never invest in something that you don’t understand.
Like the famous quote goes-
“Never invest in a business you cannot understand.” – Warren Buffett
To put it simply, if you understand how stocks work, invest in them. If you don’t understand how ETFs work, don’t waste your time and money by investing in them.
Today, there are numbers of options to invest, such as annuities, structured products, F&O segments, and stocks. Many investors get in trouble by blinding chasing the hottest thing at the moment. But, this is a bad investment strategy, which will only put your money in danger!
So, if you want to invest in certain instruments, make sure you study about them and then invest in them as per your best knowledge.
This is one of the important parts of your investing journey! It is not enough to invest in just one asset class; you must also diversify within each class as per your risk appetite. Ensure that your holdings are spread out well. Ideally, a mix of high-risk and low-risk instruments works well. It tends to give the right balance between long-term gains and regular fixed income.
Furthermore, diversification acts as a hedge against the volatility that you might be exposed to through high-yielding instruments. So, make sure that your portfolio is always diversified and thus well balanced.
Rebalance when some of your assets begin to overflow. Also, redistribute the excess to the allocations that have become underfilled. If you think your investments aren’t delivering the desired results you had anticipated over a period of time, then you should be prepared to seek alternatives.
While rebalancing, you should ensure that your portfolio does not overemphasize one or more asset, and your portfolio should be at a comfortable level of risk.
Ideally, you should prefer selling high and buying low. Also, to generate optimal returns you should consider taking the long haul. You should rebalance your portfolio on a regular basis; typically, every six or twelve months.
Your investment portfolio needs reviewing from time to time, because the returns associated with your investment instruments fluctuate depending on market movements. Also, your financial goals could change with time, which could require re-allocation of funds.
Making investment choices and setting goals is just the beginning. You should also learn and be updated about all the other avenues that are new in the market. There could be many instruments that could give optimal returns to you, so you should never miss such a chance!
Also, many investors, mostly prefer growth investing. They only invest in stocks of a growing company. But, if you are able to identify potential stocks of underperforming companies, you can end-up gaining good returns in the long-run. For that, you need to be able to gauge such stocks. This is where prospects come into the picture! Do you know, Warren Buffett followed the strategy of long-term value investing. He smartly identified potentially undervalued stocks and kept them in his portfolio. Such stocks perform at the right time.
Furthermore, many investors do not prefer investing in stocks like small-caps and mid-caps thinking that they are highly risky and also they fail to perform. For instance, can you believe that Airtel and Infosys were once lesser-known companies! Today they are top-known firms in the market. As an investor, you should know that today’s mid-cap company can be tomorrow’s large-cap! You should tend to identify such stocks and invest in them smartly!
Like the famous saying goes, EAT-SEEP-WORK-REPEAT! This somewhat applies to your portfolio too— SET GOALS-INVEST-BALANCE-REPEAT! You should always maintain the cycle throughout your investing journey.
Now when you have set your own strategy, make sure you stick to it. You can’t control the companies that you’re invested in, the markets, the political climate, the trends — really anything — except your commitment. So, be focused and stay true to it!
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