A well-defined investing strategy is one of the cornerstones of a successful financial life. While investing techniques vary widely, all good strategies are built on the same foundation. Here are six core principles you should keep in mind as you plan your own strategy.
Principle #1: Success in investing comes not in hoping for the best, but in knowing how you will handle the worst. Always remember: no one really knows what’s going to happen next. Some things can be predicted; most things can’t. Since no one really knows what is going to happen, your plan must allow for the fact that the investment markets will experience some unexpected downturns every now and then. That’s where diversification comes in. The idea is to pick investments that “march to different drummers.” This means your strategy involves owning a mix of investments that are affected by different economic events.
Surprisingly, it is possible to assemble lower-risk investment combinations that give pretty much the same returns over time as higher-risk ones. Both of SMI’s core strategies explain how to to build portfolios that combine stocks and bonds in various combinations to reduce volatility and risk while still achieving attractive long-term returns.
Principle #2: Your investing plan must have easy-to-understand, clear-cut rules. There must be no room for differing interpretations. You must be able to make your investing decisions quickly and with confidence. This means reducing your decision-making to numerical guidelines as much as possible. A strategy that calls for a “significant investment” in small-company stocks is not as helpful as one that calls for “30% of your portfolio” to be invested in small-company stocks.
As much as possible, your strategy should not only tell you what to invest in, but also how much to invest and when to buy and sell. SMI can help you know exactly where you stand and what you need to do to stay on course via monthly updates in our newsletter and on our website.
Principle #3: Your investing plan must reflect your current financial limitations. Your plan should prevent you from taking risks you can’t afford. Every day, people who mistakenly thought “it will never happen to me” find just how wrong they were. Investing in the stock market isn’t a game where gains and losses are just the means of keeping score. Money is not an abstract commodity. For most of us, it represents years of work, hopes, and dreams. Unexpected financial losses can be devastating.
That’s why the sound mind approach sets getting debt-free and building your emergency reserve as your two top priorities. Only then are you financially strong enough to bear the risk of loss that is an ever-present reality in the stock market. Other than your IRA/401(k) contributions, we encourage you to not invest any discretionary funds in the stock and bond markets until your debt and savings goals are fully met.
Click here to read more.
SOURCE: Christian Post, Austin Pryor