Whether you’re a seasoned investor or investing for the first time, it never hurts to refresh yourself on some rules for investing that have stood the test of time.
1. Diversify your investments
Portfolio diversification is perhaps the most basic component in building stable, long-term investment returns. History shows that the relative performance among different asset classes often spans a very wide range. The best-performing asset class in one period, can sometimes be among the worst asset classes in the following period. A smart way to cope with that challenge is to maintain a diversified portfolio. By using a range of asset classes such as equities, fixed income, foreign investments and commodities, among others, you can more effectively manage volatility during challenging market cycles. Portfolio diversification does not provide immunisation from severe bear markets, but it can mitigate the damage tough markets inflict.
2. Think long term
Successful investing involves patience and fortitude. No other piece of investment advice is as consistently sound as playing the long game. Markets will always have ups and downs, but over the long term the average investor can profit. The reason is that time is a form of diversification. A long-term examination of the ASX shows the longer the holding period, the more reliable growth-oriented investments can become.
3. Resist herd mentality
Your financial choices and decisions should be based on your objectives, risk tolerance and time horizon—not on what everyone else is doing, or worse, moves based on market panic. The stock market is essentially a crowd. There are times when following the crowd is a sensible strategy and there are times when going your own way is a much better idea – recognising the difference can be difficult.
4. Know your tolerance to risk
While there is risk involved in investing, knowing your tolerance to risk—that is, how comfortable you are investing through market cycles that may produce negative returns—will help you determine the investment strategy that’s right for you. Three key types of risk are inflation risk, which is the risk that your investment might not keep pace with inflation; market risk which is the risk that a market may go down in value; and liquidity risk, which is the risk of not being able to buy or sell an investment when desired. Understanding risk is key to becoming a more savvy investor.
5. Mitigate behavioral biases
Even the most unemotional investor can fall prey to behavioral investing traps. One typical bias is anchoring, where an investor fixates on a certain price levels such as the price paid for a particular stock. If new information becomes available or the investment landscape changes, it becomes a trap to look at the price of a stock as it ‘should be’. Another bias is mental accounting where an investor divides wealth into arbitrary categories and makes irrational decisions based on the category, such as a stock purchase or sale tied to an emotional attachment to the company.
6. Finally, be flexible.
Remain flexible when it comes to your investment plan. “The key to successful investing is not getting too dogmatic with your views,” says Mike Wilson, Morgan Stanley Wealth Management US Equity Strategist and Chief Investment Officer [HK1] “It’s important to understand that the world is a changing environment and the rate of change is often what drives investment success or failure.” Be willing to change your strategy as global markets, tax policies and interest-rate environments shift. It is also important to revisit your investment strategy as your goals, life situation and cash flow needs change.
Investing wisely is essential to reaching your financial goals. And knowing which investments are most appropriate for you, what strategies make the most sense and how best to execute them requires in-depth knowledge and experience. Your Morgan Stanley financial adviser can help you create an investment strategy geared to your specific needs, risk tolerance and time horizon—charting a course that will help you achieve your goals.
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