3 Golden Rules For Investing
Successful investing means not only accepting risks that generate expected returns, but reducing risks that do not. Avoidable risks include holding too few securities, betting on specific countries or industries, following market predictions, and investing in flawed products. Below we have listed three golden rules that will help you invest wisely.
Diversify
Diversification is the best way to minimise investment risks. A well diversified portfolio significantly dilutes the impact of unpredictable events on single assets, and positions the investor to capture the returns of the entire market.
Diversification means combining assets which have prices that move in different directions. For example, buying shares in an oil producer (e.g. Woodside) and a company dependent on oil (e.g. Qantas) will allow you to reduce volatility due to external factors (the oil price in this case) while retaining the combined return of the two shares. Diversification allows you to increase the return and/or lower the risk when two or more investments are combined in a portfolio.
While it may seem intuitive to spread your investments around, there is some science behind the process. You can diversify in a number of ways:
· Spreading your share portfolio across a range of industries or sectors. Bank shares, retail shares, mining and resources equities and biotechnology shares would all behave very differently in a range of different economic circumstances;
· Diversifying across asset classes. Shares, property, fixed interest and cash all benefit at different stages of the economic cycle. Ideally, falls in one asset class are offset somewhat by gains in another; and
· Diversifying across international borders. Certain events (such as local economic conditions or internal politics) may affect one country, but not another.
Know Your Risk Profile
Goals are an essential part of financial advice. Your goals need to be quantified, which is something your Financial Planner should work with you to establish. Measurable goals provide a chance to look back and see what you have achieved. Accurate goals also form a firm foundation for financial projections when investing.
On the basis of your stated goals, you can assess your required level of risk. The required level of risk is the amount of risk you need to take in your investment portfolio to get you from where are now, to where you wish to be.
When assessing the appropriate level of risk to take when investing, your ability to take financial risks should also be considered. Risk tolerance is a measure of your feelings towards investment volatility and losses on your portfolio. While it is difficult to measure accurately, it is an important factor in the advice process. This has a significant impact on the advice provided by your Financial Planner.
As with the factors above, your tolerance to investment risk may change over time or in response to other significant lifestyle changes, such as achieving a financial milestone or altered family circumstances. It is important that your Financial Planner reviews your attitude to financial risks from time to time. This ensures that they have an accurate ongoing understanding of your overall Risk Profile and you can be advised and choose to make amendments to your portfolio when the time is right.
Don’t Panic
In the current financial climate it is expected that the market will yo-yo, When this happens it's important not to panic. Fluctuations are a natural behavior in the investment markets.
You cannot predict the future, so before investing see your Financial Planner, do your research and be patient when choosing the right companies to invest in. Remember if it is a long term investment, don't stress the market's short-term fluctuations.
