Key Takeaways
- Successful investment management is based on diversification and asset allocation.
- Diversification means investing in several different areas, and asset allocation is how much in an area you invest in based on several factors specific to you.
- Time frame is important in investing as you need to be consistent.
Let’s say you have thirty people coming to a party you are throwing, and you decide to have steak, potatoes, green beans and apple pie on the menu. While that might sound great to some people, it doesn’t really appeal to a wide range of palates. Instead, you’ll probably serve a few types of appetizers, a range of entrees, and options from fruit all the way to triple chocolate cheesecake, yummy!
Now, you happen to know that most people coming to your party are vegan, so you’re going to have more of those dishes available than perhaps your meat-focused menu items.
Investment management is like this. It’s diversification (all the different meals) and asset allocation (more of one type of food item than another).
Let’s look at diversification. We know that 2/3 of the time over the last 30 years, greater investment returns and less volatility come from being extremely diversified. What does that mean? It means investments in the form of:
- Stocks – in the US both large and small, and in both internationally developed and emerging countries
- Bonds – issued in the US by our government, municipalities and corporations
- Bonds – internationally and developing markets
- Real estate
- Commodities
- Master Limited Partnerships (MLPs)
There are other kinds of investments as well, but investing in several areas is what makes your portfolio diversified.
What is asset allocation? It’s an investment strategy that requires a few areas of input to determine how much you invest where. These areas are:
- Your propensity for risk – how do you feel about taking some risks?
- The risk versus reward that you want.
- Your goals and the way you operate
- Your time frame
Let’s take a closer look at time frame. There are two key things to successful investment management when we talk time frame. The time and the discipline, they don’t change. The time could be trading by the second, or over years, and the discipline could be fundamental, or technical based. It could be for value and growth investing. There are many kinds, but whatever they happen to be, they must be consistent.
If you’re a chef, you can put out some great plates that meet a diverse group of palates. Likewise, when it comes to investing, you can do it yourself or maybe look at hiring a professional. Whichever way you do it, it’s about making smart decisions to successfully build your wealth!
Until next time, enjoy.
Gary