How Does America Invest now? Armada Labs Gives an Expert Answer
Vanguard, one of the world’s largest investment companies, has done in-depth research on the actual investor behavior in the U.S. And now, Armada Labs is glad to share the key insights on how you can turn investments into success.
Following the research performed among over 5 million investor households, several persistent trends were defined. Based on these, an action plan on building an effective portfolio was elaborated.
An Action Guide for American Investors
Balancing Equities
Throughout their operation, investors should deal with equities. Besides the obvious risks, these provide opportunities for return in the long-term. But the key to success is to find the right balance.
As the research shows, loan allocation differs among generations. Millennials and Generation X tend to act more “risky,” often investing in equities even more than they should. On the other hand, the Silent generation, or Beyond boomers, invest too little, and only Baby boomers seem to spend reasonable sums on equities.
To define which sum is reasonable to invest in equities, look at your portfolio, and consider your goals. The goals should define your level of acceptable risk.
Second, ask for professional advice. You may seek guidance from a specialized advisor or advisor service. Those can help you balance risk and return and accompany you with tax issues that may arise during investing.
However, taxes should not be the main subject of your focus; otherwise, you risk making wrong investment decisions. Yes, taxes are important, but investment issues should come first.
Don’t overestimate the P/E ratio. Mature investors often think that price-earnings ratios are crucial, but they are not. After all, you should not focus on one metric only; instead, consider the P/E ratio in conjunction with other indicators.
Portfolio Diversification
Holding a diversified portfolio of equities, cash, and fixed income lets you better prepare for related risks in the long term. Overall, the portfolio of an average American investor looks more or less as in the below image.
However, each loan investor’s situation is different, so the distribution of assets in each portfolio must reflect your investment goals. If, say, you need to save money for mortgages, choose a more conservative way of allocation with the dominance of fixed income. Alternatively, if you want to build up real capital on the investments in the long term, equities should constitute the major part of the portfolio.
Index and Active Strategies Combined
For the last several years, American investors have been using active strategies less frequently and have been gradually shifting to index ones instead. On the other hand, newcomers tend to stick to index strategies alone, which allows them to combine cost-efficient portfolios. However, the potential for better performance may be reduced in this case.
First, let’s clarify the essence of each strategy. An active portfolio strategy is an approach that suggests trading investments to beat market returns. Adversely, an index portfolio strategy is the one where you buy and sell less and are more likely to buy assets and hold them.
The main advice here is: don’t neglect active portfolio strategies. Since they are low-cost, they present tremendous opportunities for further portfolio diversification and increased performance. Combine both approaches, and you will build a portfolio that meets your goals.
By the way, long-term portfolio investments can bring even greater success. Yes, active trading can bring profits, but only in the short term. On the other hand, a so-called “buy-and-hold” approach suggests actively selecting investments without considering short-term price movements. In this way, you can keep a relatively stable portfolio for a long time without considering price fluctuations.
Rebalancing at Turbulent Times
Over time, American investors are likely to maintain their asset allocations consistent. At some point, most of them focus on portfolio rebalancing.
As we can see, in 2019, most American investors made significant changes to their holding through rebalancing. In the long term, those who keep their portfolios diversified are more likely to succeed, while short-term actions may only slightly improve their performance.
Don’t stand still. Repurposing goes with portfolio adjustments; check the asset allocation regularly, at least once in six months, against the current roadmap and see whether they correspond to the goals you are currently setting. A slight shift of 5% or so from the target may turn into a disaster if not adjusted in time.
Don’t get yourself fooled by “cheap” stocks. Some believe they will lose less if they buy stocks at lower prices. But let’s be honest: in reality, a $5 stock has the same chance to lose its value completely as a stock with a price of $75. In both cases, you lose 100% of the initial investment.
In reality, low-priced stocks seem even riskier than higher-priced ones. But the devil is in the details; securities with lower prices have small market caps and are often traded outside major market exchanges.
Another threat is the lack of regulation. “Small-cap” stocks are not listed publicly, and the SEC doesn’t validate them. Thus, the stocks aren’t regulated as, say, the ones represented on NASDAQ. Plus, the tiny pieces of information you can find about these stocks usually come from non-credible resources.
To Summarize
Though the stock market is volatile and sometimes uncertain, there are sound actions that can increase the chances for long-term success. Although some investors make profits by selling high-volume stocks and keeping low-performing ones, the approach doesn’t guarantee profits in the long-term. Often, good stocks tend to grow further, while bad ones zero out completely.
Instead of going an obvious way, you can take more “thought-out” actions described in the article. With the strategy in mind, you will head your investments in the right direction and eventually make the most of them.
