In this guide, noted financial expert Andrew Binetter presents three critical portfolio management strategies that are designed to improve the chances of investors achieving financial stability and success.
In the world of investing, one thing is certain: there will always be risk. For investors, there are many potential pitfalls to avoid as they build their portfolios, some of which can erase any gains those investors may have enjoyed. To manage one’s portfolio successfully, investors need to stack the odds in their favor, and this is done so by adhering to certain aspects and best practices.
Building a Margin of Safety
As mentioned in the introduction, investing comes with certain risks. Risks can vary between investments; volatile stocks in the technology sector tend to represent a higher risk level than stocks in established Fortune 500 firms. It is managing this risk with an eye toward building a stable, safe investment portfolio that is the first key to portfolio management.
Investors first need to become aware of their own risk tolerance, determining what amount of risk is acceptable before making investments. For younger investors just starting their careers and with time on their side, more risky investments tend to make sense. With many years to retirement, any volatility in the stock market or losses of capital can be overcome. Older investors, particularly those nearing retirement age, must be more cautious, investing only in the financial products that represent low risk levels.
The next step toward building safety into one’s investment portfolio is a tactic recommended by investment professionals for years: diversification. By investing across markets and industries, investors can better weather any downturns in those markets. Investors may choose to diversify by purchasing smaller amounts of many different stocks, or may invest in several different financial products altogether — financial assets such as stocks, mutual funds, real estate, and Treasury bonds, only to name a few of the many choices.
Finally, being conservative in valuation of assets is a smart solution that improves the margin of safety. When the markets are booming, investors tend to become too optimistic, potentially overvaluing their prospects. To prevent making this mistake, it is a good idea to estimate future growth rates at conservative levels, following the long-term view of stock performance as a gauge.
Invest Only in What You Understand
Faced with a myriad of hot company stocks in emerging sectors like technology or medical cannabis, many investors make the mistake of putting substantial funds into those sectors. While significant gains can be made in this way, this investment strategy represents an incredibly high risk level. The problem is that many investors simply do not understand these markets, including how new businesses make their money or what future growth projections may be. To counter this pitfall, most investment professionals recommend that investing within one’s knowledge base makes smart financial sense. In simple terms, if an investor cannot pinpoint the economic workings of a given market or industry, and can’t accurately make predictions about the future performance of that market or industry, it is a good idea to avoid investing there.
Focus on Business Performance, Not Stock Price
Too many investors are seduced by skyrocketing stock prices, particularly in hot markets like the tech sector, claims Binetter. Stock values in these markets are highly volatile. The question investors need to ask before making stock purchases in these areas is “what is the business performance of the company in question?” If a company’s stock is rising, yet the company itself is bleeding money, this is a sign that investment in that company’s stock is not a sure bet. Investment isn’t gambling; to achieve financial freedom, one must make smart decisions to avoid getting wiped out in a market crash. To do so, investing in companies that have lengthy performance track records is a good idea. Acquiring investment assets that generate cash returns, then protecting those assets in tax-advantaged ways and letting time do the rest is the ultimate key toward a stable, successful financial future.