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Investment Review
Manage episode 297387662 series 2936925
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The Perfect Investment
4 Investment Strategies
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These are the most common and most powerful investment strategies available to young and old investors alike, designed to help you maximize returns and minimize risk so that you build more wealth over time:
- Diversification
- Asset Allocation
- Dollar-Cost-Averaging
- Portfolio Rebalancing
Asset Classes
In order to implement the 4 Investment Strategies outlined in today’s lesson, it is very important that you understand the differences between asset classes. There are many many different asset classes, sometimes referred to as “styles”:
- US Large Cap
- US Mid Cap
- US Small Cap
- International
- US Government Bonds
- US Corporate Bonds
- Municipal Bonds
- International Bonds
- And the list goes on and on…
Three Big Factors
Three factors determine the performance of your portfolio:
- Asset Allocation,
- The Selection of Assets (Stock Picking), and
- Market Timing
In a ten-year study of ninety-one large corporate pension plans in the United States, the authors of an article in Financial Analysts Journal found that…
94% Of Performance Was Determined By Asset Allocation.
Many of us are tempted to wait for a windfall—winning the lottery or a big inheritance from Aunt Phoebe—before we even start to invest. Our hopes are high because we’ve heard stories of people who hit it big, but those stories are in the news because they’re so rare, not because they’re commonplace.
The best way to develop a substantial nest egg is to develop the discipline of putting money into a fund every month—no excuses. The market will go up or down, but our funds continue to grow slowly and steadily. I know people who began putting as little as $25 a month into an investment, and over time, they’ve accumulated a substantial amount of money.
When they were young, they had every reason to put off investing because they could easily use that $25 for dinner and a movie. But they were committed to save and invest, even if it was a small amount. When they got promotions and raises, they increased the amount they put away each month.
To explain the benefit of regular investing, I use the illustration of a farmer who invests each month in his favorite commodity: Cows.
Portfolio Rebalancing
Portfolio Rebalancing is Like Balancing a Tire, it’s the process of realigning the weightings of assets in your investment portfolio. Rebalancing involves periodically buying or selling securities to maintain an original or desired or risk level.
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