Important Investment Concepts to optimize your Portfolio
Important Investment Concepts to optimize your Portfolio (Seguros Ginestar Costa Blanca).
We are going to examine different investment concepts that are fundamental to successful value portfolio management. Notice none of these concepts require us to be a genius or have some special skill. However, it does involve putting a little effort and time into changing the way we think and approach investing.
1. The Importance of Time
The question of when to start investing for retirement seems easy, but few people understand the importance of the answer. Exponential growth is the powerful investment concept that makes time the most important factor in determining the value of your portfolio. The earlier you begin to invest, the greater the probability of having choices and a quality retirement. Because of the power of compounding, the investments made in your early years should be worth many times over the value of your investments made closer to retirement.
2. Keeping 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 investor’s returns.
3. Asset Allocation
Asset Allocation is what will determine the vast majority of your returns. It is the most important decision you can make in investing. Studies have shown that the average investor’s actual investment returns are considerably lower than market averages. This is because people tend to buy when prices are high and tend to sell when prices are low. Historical analysis has proven that the valuation of investments when they are purchased will determine long term returns (time periods of 10 years or more). Buying at high valuations produces low returns. Buying at low valuations produces better than average returns. When you buy is something you can control. Be conservative when valuations are high. Hold cash and be mentally prepared to buy more stocks when prices are bargains.
4. Proper Diversification
The goal is to combine assets that have a low asset correlation. You want to own many assets that will act differently and provide the benefits of diversification. In order to get the maximum benefit of diversification you might want to own the best 1 or 2 stocks in several different industries. Stocks in different industries will most likely have a lower correlation than stocks in similar industries.
5. Don’t Follow the Crowd
In portfolio management, following the crowd can lead to poor investment returns. John Templeton said “If you want to have better performance than the crowd, you must do things differently from the crowd”. Following the crowd is “group thinking”. There is an emotional comfort in doing what everyone else is doing. We feel good when others agree with us. We are comfortable when we follow the majority. The value investor must learn to be comfortable as an individual, an individual who thinks differently than the majority. If everyone is bullish on a stock, industry, or the market, beware; that means there are few investors left to buy but instead many are invested with the ability to sell. If everyone is bearish, look for opportunity; there are few investors left to sell and the price may be a bargain.
5. Don’t Follow the Crowd
In portfolio management, following the crowd can lead to poor investment returns. John Templeton said “If you want to have better performance than the crowd, you must do things differently from the crowd”. Following the crowd is “group thinking”. There is an emotional comfort in doing what everyone else is doing. We feel good when others agree with us. We are comfortable when we follow the majority. The value investor must learn to be comfortable as an individual, an individual who thinks differently than the majority. If everyone is bullish on a stock, industry, or the market, beware; that means there are few investors left to buy but instead many are invested with the ability to sell. If everyone is bearish, look for opportunity; there are few investors left to sell and the price may be a bargain.
6. Buy Businesses – Not Stocks
When you buy a stock you are purchasing a business. Just because it is a fractional share doesn’t mean you shouldn’t treat it the same as if you were buying the entire business. Your perspective matters because it determines how you think and make decisions about your investment. Buying businesses, not stocks, is one of Warren Buffett’s more important investment concepts. Your investment is not a piece of paper that you worry about the price every hour, day, or week. Think and behave like a business owner. Analyze the company like you are buying the entire company.