Three Basics of Safe and Successful Investing

Three Basics of Safe and Successful Investing 

Most all investors would do well to remember three "basics" of safe and successful investing during the course of his or her financial life: diversification, patience, and consis­tency. Regardless of how the markets perform, these practices should be a part of your investment philosophy.

Diversification: key #1 to safe investing

While financial markets are by nature uncertain, there are ways to reduce risk.

The saying “Don’t put all your eggs in one basket” has real value when it comes to investing. A biblical principle can be found in Ecclesiastes 11:2, “Divide your portion to seven, or even to eight, for you do not know what misfortune may occur on the earth” (nasb).  In other words, there is wisdom in dividing your wealth  into several parts and not risking it all in one place.

Diversification and proper asset allocation do not guarantee safety or success, but they do reduce risk. Asset allocation is simply the percentage of a portfolio allocated to different asset classes such as stocks, bonds, and cash. Investment selec­tion is the process of selecting choices within each asset class. 

Studies conducted by Ibbotson Associates, Inc., show that more than 95 percent of an investor’s returns come from asset allocation and investment selection. Why? Because different investments perform better at different times. In a bear market, certain asset classes may perform better than others. The same goes for a bull market. If your assets are held mostly in one kind of investment (say, mostly in growth mutual funds or CDs), you could be hit hard by stock market losses, or alternately lose out on potential gains that other kinds of investments may be experiencing.

There is an opportunity cost as well as risk. This is why asset allocation strategies are used in portfolio manage­ment. A financial advisor can ask you about your goals and tolerance for risk and assign percentages of your assets to different classes of in­vestments to suit your preferred invest­ment style and your objectives.

Mutual funds are a great way to diversify. Mutual funds offer a high degree of diversification within a single fund. Even there, invest in different types of funds: small-cap, mid-cap, and large-cap funds, emerging markets, growth and income, etc.

Here is a sample* illustration: Asset Allocation Investment Selection

Stocks 45% (Large Caps 20% Mid Caps 10% Small Caps 5% International 10% )
Bonds 30% (Corporate 15% Treasuries 10% Municipal 5%)
Alternative Investments 20% Hedging Instruments 10% REITs 5% Precious Metals 5% Cash 5% Money market 5%

* For illustrative purposes only.  You should consult a qualified financial advisor regarding an appropriate allocation for your unique situation.

Patience: key #2 to safe investing

Impatient investors obsess on the day-to-day doings of the stock market. Have you ever heard of “day trading” or “market timing”? These are attempts to exploit short-term fluctuations in value. These investing methods might seem fun and exciting, but they will add stress and anxiety to your life, and they are a poor alternative to a long-range investment strategy built around your life goals.

Consistency: key #3 to safe investing

Most people invest a little at a time, within their budget, and with reg­ularity. They invest $50 or $100 or more per month in their 401(k)s and similar investments through payroll deduction or automatic withdrawal. In essence, they are investing on “autopilot” to help themselves build wealth for retirement and for long-range goals.

Investing regularly (and earlier in life) helps you take advantage of the power of compounding as well.

Are diversification, patience, and consistency part of your investing approach? Make sure they are. If you don’t have a long-range invest­ment strategy, talk to a qualified financial advisor today.