Everyone knows that they should set aside some amount of money for investment purposes. What isn’t so commonly known, however, is how to optimize your investments for greater stability and better returns. Here are four tips that investors should keep in mind as they build their investment portfolios.
Balance Risk and Return
Many investors, particularly those who are new to investing, make risky investments on the basis of perceived higher potential returns. Though this strategy can play well in the short term, it isn’t a formula for longer-term financial success. Even if you make great returns for several years in a row, all it takes is one investment going bad to wipe out years of gains. Just like gambling in a casino, you can have a lucky streak but eventually you will give all that money back to the “house”.
Just like the old story of the tortoise and the hare, when it comes to investing, “slow and steady wins the race”. Your investments should be balanced in such a way that they are risk neutral. Over enough time, even lower-risk investments can produce healthy returns.
In the following video we will look at the 5 Types of Portfolio Risk which is:
- Concentration Risk- Investing too much in any one stock.
- Beta Risk- Investing too much in volatile stocks.
- Industry Risk- Investing too much in any one sector.
- Country Risk- Investing too much in any one country.
- Company Size Risk- Investing too much in large, medium or small companies.
Consider Dividend-paying Stocks
The power of compounding interest in investments is one of the most powerful elements of modern finance for building wealth. A similar concept is that of the dividend paying stock, which will both appreciate in value and pay out annual or quarterly cash payments. The best dividend stocks for long-term growth are ones that offer a dividend reinvestment program. Such stocks allow investors to have their dividends reinvested into more shares. Over time, this will produce a considerable amount of equity in the shares and a higher level of potential cash flow from dividends.
Seek Expert Advice
Though some investors see excellent returns on their own, many are too busy to fully immerse themselves in the world of finance plus as an amateur it is difficult compete with professional investors with virtually unlimited resources at their disposal.. For these investors, it’s usually best to seek out a professional financial advisor or wealth management firm. Expert advice can provide you with solid guidance toward achieving your personal financial goals.
Invest in Owning Your Own Home
When people talk about investments, they are typically referring to securities like stocks and bonds. The truth, though, is that there are many kinds of investments that can help you build wealth. One of the most important of these is the home you live in. To secure financial stability in the long run, you should own your own home. Not only will this save you money in long-term rental payments, but it will also give you substantial equity in an asset of your own. The major advantage is that it is a “leveraged forced savings plan” that tends to keep up with inflation. What that means is…
- Leveraged- it is using other people’s money (i.e. the bank) so initially if you have put 10% down and borrowed 90% of the value of your house if it goes up in value by 10% you have doubled your money because the amount you owe the bank is still the same so you get to keep all the profit.
- Forced Savings- If money gets tight the last thing people are going to skip paying for is food but the second to last is their mortgage payment. However, it is very easy to skip paying money into an investment or savings program. Actually, it is probably the first to be skipped for almost any reason at all.
- Keeps up with inflation- because a house is a “real asset” housing prices tend to keep up with inflation so not only do you get to pay off the mortgage with inflated dollars but the price of the house goes up as well.
Building wealth is a process that takes years of sound decision-making and careful planning. When executed properly, though, the results can have a tremendous positive impact on your life. Wherever you are in life at the moment, investing for growth should be one of your top priorities.
You may also like:
