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A Basket of Investments Really is the Answer

Updated on July 28, 2014
Basket of Investments
Basket of Investments

Why Diversification of Your Portfolio in Important

Investors use lots of fancy words, but one of the most common terms for assuaging newbies is diversification. In much the same fashion as you would not pin all your hopes for life success on just one opportunity, so it is with investments. In fact, the best strategic advice for any investor is to diversify across a broad range of tradable assets. By implementing such a strategy, you can limit your risk and losses when the markets turn bearish. It's not always about what you buy; it's about where you invest.

Obstacles and Opportunities – Navigating the Markets

During a market’s Bull Run, you are unlikely to find traders selling stocks for less than they purchased them for. When equities appear to be rising in value, the vast majority of investors plough into the stock market. It is only when stocks start turning south that investors dump them and choose instead to invest in commodities like gold, interest-bearing bonds, and long term fixed investments. With so many factors operating together simultaneously, it's impossible to anticipate the precise direction of movement of the markets at any given time.

A wide range of factors can influence investor sentiment, including the release of employment data, GDP, inflation rates, interest rates, geopolitical news and most importantly the perception that investors have about the markets. In this vein, it makes sense not to pump all of your resources into any one asset. There is no magic pill that allows investors to understand the precise inner workings of the global markets; this elixir has yet to be found. What the investment community does as a counter to the uncertainty that exists in the markets is known as diversification. A portfolio of investments is precisely what constitutes the asset holdings of the world's most successful business people.

• Spread Your Investments for Maximum Yield

Stock Markets
Stock Markets

Sound Advice for Savvy Investors

It has been established that the majority of losses have already occurred by the time investors are ready to diversify, when they do so in a reactive manner. With this knowledge in mind, it is important to begin investing across multiple different sectors, spanning mutual funds, individual stocks, commodities, Treasury bonds, property and other types of assets. By spreading your available resources across a wider range of investments, you can capitalise broadly, while minimising the effect of losses in individual sectors. This brings us to the first of 4 tips for sound investment advice: spreading your wealth across multiple sectors. By doing so, you limit the damage that can be done if the markets turn against you.

There are other ways to invest your hard earned money, other than equities. These include bond funds or index funds. Remember that an index measures an entire segment such as the S&P 500 index. By investing in the entire fund, you are diversifying your risk, and anticipating that the entire index will perform well overall. This mitigates the effects of market uncertainty and market volatility. Of course, you will only benefit from investments if they are ongoing. To this end, it's important to understand terms such as cost averaging. By investing regular or incremental amounts over time, you will be able to gain the most benefit from fluctuations in the market. This practice will allow you to compensate for buying into the market at perhaps the wrong times when prices are too high. A mistake that far too many novice investors make is that they invest a lump sum at the wrong time. A good strategy is to break that initial investment amount into smaller amounts and invest over a period of time.

Exit Strategy

The Benefits of an Exit Strategy
The Benefits of an Exit Strategy

The Benefits of an Exit Strategy

If it's important to know when to enter the markets, it's equally important to know when to exit the markets. Investments like other types of ‘organisms’ have life cycles. When the going is good, investors stand to profit, yet when things start to turn south it may be a good idea to re-evaluate your position. Sometimes, it is advisable to buy when markets begin a bear run; at other times this is a good indication to get out before the bottom falls out. Intuition, knowledge and investor sense work together to give you a good indication of precisely what you should be doing under the current circumstances.

Another factor that so many investors fail to take heed of is that of commissions. Commissions come in many different forms, including monthly charges, transactional fees, fixed costs and other unseen costs that are worked into contracts. What may appear to be cheap on the surface oftentimes requires traders to pay substantial fees per transaction.

Viewed in perspective, it is clear that investing needs to be undertaken as a long-term endeavour. There are plenty of fluctuations that pepper the market. These often come in the form of surprise announcements, geopolitical crises, supply shocks, and performance figures that go contrary to analysts’ expectations. By and large, investing is a didactic and potentially rewarding experience. There is plenty to be gained by dabbling in a variety of investment options; the key is knowing what your risk exposure profile is, and understanding what your investment objectives are.

Your time horizon is particularly important, because this will detail how long you have to generate the yields that you're looking for. Generally, long-term investments are great for setting up retirement income, while parents who need money for their children's university education would likely not be looking at long-term investments. In much the same fashion, you need to evaluate your risk preference versus the potential rewards that you stand to gain. Oftentimes the higher the risk, the greater the potential rewards, but not always. There is risk involved in every investment, but the higher risk investments oftentimes carry with them sweeter rewards!

Wall Street Stock Exchange

Wall Street Stock Exchange
Wall Street Stock Exchange | Source

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