3 Reasons To Change Your Ways To Build Your 7 Figure Nest Egg
Day-to-day life has plenty to teach about investment strategies. Everything from your Monopoly game to your shopping trip demonstrates an understanding of core financing principles. All you have to do is learn how to apply them.
-1) Asset Allocation, Cooking, and Monopoly
If you only put one ingredient into each meal, your taste buds would suffer as much as your health would, and the same is true of investing. Your portfolio needs to be spread across asset categories, time horizons, and risk profiles.
As you have learned in the game Monopoly, having cash on hand is equally important, otherwise, you would not be able to pounce on important opportunities or cover unexpected bills.
Your time horizon is how long you plan to leave an investment untouched before you sell. It's set according to your goals and the specific risks of each investment vehicle. Some economic cycles are sluggish and others volatile.
-2) Risk Tolerance
Some people like to prepare meals according to a known risk-free recipe, and others prefer to take greater risks by creating their own dishes. The same is true of investing. Every personality has its unique approach to risk.
The question is how big is your appetite to lose some or all of your original investment in exchange for greater potential returns. Conservative investors have low-risk tolerances that make them better suited to lower risk assets and vice versa.
-3) Risk and Reward
There is no gain without pain. Risk-free investments are the unicorns of the investment world: they simply don't exist, even if someone in a bespoke suit swears they do. High risk and high returns go hand in hand, and the inverse is true.
Investment Choices
There are enough investment products on the market to baffle the most experienced investors.
Stocks are high-risk products ideal for those with high-risk tolerance. They are appropriate for long-term financial goals and not made for short time horizons. If you have the stomach to wait out volatile phases, you might be in line for epic returns.
Bonds are slightly less volatile. Reduced growth potential isn't universal to this product, though. There are high-risk bonds that produce potentially high returns.
Cash, treasury bills, and other cash equivalents marry low returns with low risks. Some are even government guaranteed. The sole risks of these products are the inflation and exchange rates, which can erode your investment.
Sometimes the risk outweighs the potential returns, but sometimes security is more important.
Real estate, private equities, commodities and precious metals are examples of asset classes with unique risk and reward profiles, so they must be selected individually.
Diversification
You would lose your Monopoly game if you only bought one property, so don't make the same mistake with your investments. By spreading your portfolio across different classes, risk profiles, long and short-term goals, you can enjoy increased security and higher returns.
Getting Started
Investing isn't a once-off decision set. Goals change, and so should your asset allocation. Once you have met your most important goals, you are ready to move onto a different time horizon, which comes with its own (often higher) risk tolerance.
Asset allocation models need to be selected not according to what the Wall Street Journal calls a best practice, but according to your unique financial objectives. Single young people with high salaries can afford to diversify only in stocks, but parents saving for college and baby boomers would need diversification across more asset classes.
Diversification Basics
A diversified portfolio needs to be spread between asset categories and within asset classes. Your goal should be to select investments in segments of each asset category that may react differently under different market conditions.
This way, some of your money is easily accessible; some are invested aggressively, and some are more secure. Mutual funds make diversification easier for those with a small portfolio.
Much of investment strategy can be applied when women use their natural strengths such as asking your financial professional "how does this strategy help me achieve my financial goals?"
You can make an excellent beginning as long as your adviser allocates your portfolio in a way that meets your unique needs.
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