Too many investors put together a portfolio without the foundational investing concepts required to manage a portfolio.
The following investing concepts will lower your risk, reduce your mistakes, and improve the probability of average rates of return.
1. Know What Kind of Investor You Are
There are active and passive investors. Passive investors rely on index funds and ETFs with a strictly buy and hold strategy. Active investors use investing strategies that include stock selection and/or market timing with the goal of reducing risk and/or achieving above average returns.
It’s important to understand your methodology and make decisions based on what you believe. Popular stock investing strategies include value investing, contrarian investing, growth at a reasonable price, growth stock investing, and momentum investing.
2. Understand Basic Investment Concepts
The importance of understanding basic investment concepts cannot be understated. Concepts such as the importance of time, preservation of principal, risk management, diversification, and asset allocation can make the difference between being broke and building a substantial investment portfolio.
3. Keep Expenses Low
High expenses do tremendous damage to portfolio values. Choosing the best investment vehicles is the first step in keeping expenses low. The mutual fund expense ratio is notorious for sapping an investors returns.
One percent can make an unbelievable difference. A $100,000 investment for 30 years earning 6.5% grows to $699,179. A $100,000 investment for 30 years earning 5.5% grows to $518,738. In other words, if your expenses lower your return by just 1% annually, you make $180,000 less over 30 years on a $100,000 investment!
4. Create a Maximum Drawdown Plan
A drawdown is the amount, usually expressed as a percentage, your portfolio declines from a peak to a low. The biggest risk of investing is losing your principal. Every investor should have a risk management plan that includes calculating your probable maximum loss .
Once you lose your principal that money is no longer available to grow and recoup your investment. If you have a 50% gain and a 50% loss you are not at break-even but have lost 25% of your portfolio. That is why it is important to implement portfolio risk control strategies .
5. Do It Yourself, But Not By Yourself
The benefits of self directed investing are numerous. It has never been easier to manage your own portfolio. Because of technology everyone has access to investing information and can execute transactions at record low prices.
Most investors lack the knowledge, skills, or confidence to go completely solo. It’s a huge benefit to find a service that can provide the guidance and investing concepts that will help you make wise decisions.
There are many inexpensive services to choose from. Find a firm or individual that has the same core philosophy and investing beliefs that you do.
Manage Your Portfolio
Know what kind of investor you are.
Understand basic investment concepts.
Keep expenses low.
Have a maximum drawdown plan.
If you employ these 5 investing concepts you will have have laid a solid foundation towards being a successful investor. You can have the best of both worlds today: stay in control of your accounts yet get the guidance you need to be successful.
Related Reading: 5 Value Strategies For Asset Allocation