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Remembering the Basics of
Investing
A bull market can leave many investors feeling pretty good about their ability to
prosper. Their confidence bolstered by the good times, some even find themselves
swept up in "bull market myopia" and forget the basic tenets of smart investing,
like asset allocation and portfolio diversification.
Stock returns have averaged 15% over the past sixteen years, beating the long-term return
rate since 1926, which is more like 10%. Extraordinary performance, however, can
create a false sense of security. As a result, many investors can make mistakes such as
overdosing on equities, concentrating too heavily in one particular stock, picking stocks
on their own, trying to time the market, failing to rebalance their portfolios, investing
short-term money in stocks, or basing their investment goals on unrealistic market
assumptions.
Investors should regularly review their answers to some basic questions: What are my
ultimate investment goals? What is my tolerance for setbacks? How fast do I want my
investments to grow? How quickly do I need to reach my goal? Is my primary
concern financial security or (higher) potential rewards? To what extent do I need
access to my assets? The answers to these questions are the same as they have always
been: asset allocation, portfolio diversification, a long-term investment strategy, and
professional management and investment guidance.
Asset Allocation
Asset allocation involves spreading your holdings across different asset classes which
typically include stocks(equities), bonds (fixed income), and cash
equivalents. Basically, asset allocation means not putting all of your financial eggs
in the same basket.
Asset allocation is important because it helps balance risk and reward. In general, the
greater the investment risk, the higher the potential for increased total returns. By
spreading your holdings among different asset classes, you help balance risk with
reward. Assessing your goals, your timeframe, and your risk tolerance are critical in
determining what types of assets to purchase, and in what proportion.
Portfolio Diversification
Once an appropriate asset allocation has been determined, diversification within those
asset classes is necessary to achieve an effective, well-rounded investment strategy and
to reduce risk. If you hold only one large investment, your portfolio may become
lopsided, and generate poor long-term results.
A diversified portfolio should include stocks or funds from different industry sectors,
such as technology, financial services, and consumer staples. Diversifying assets
across a variety of industries tends to balance an equity portfolio. Often times,
while one sector is experiencing poor earnings, another group with different investment
characteristics is thriving in the same economic environment.
In addition, a diversified portfolio in today's global business environment should also
include both domestic an international investments. The benefit of having a
geographically diversified portfolio is that different economies frequently experience ups
and downs at different times.
The Importance of Professional Investment Guidance Regardless the performance of the
market, the importance of experienced investment guidance and professional equity research
cannot be overstated. A qualified financial consultant can assist you with portfolio
review and to discuss strategies for achieving you financial goals. By understanding
the basics of investing, working with a professional to design an appropriate portfolio,
and allowing you investments time to grow, you can invest successfully.
Susan Posey is an Investment Consultant
with IJL Wachovia in Columbus, Georgia. IJL Wachovia, a division of Wachovia
Securities, Inc., is one of the nation's largest regional full service brokerage firms,
offering a full range of investment services to investors. |
