Keeping a healthy perspective on your portfolio allows you to focus on what you can control which is a key strategy to investment success.
As I work with my clients to create an investment plan, the first step is to understand their goals and time horizon. Once that has been agreed upon, one of the important conversations we have is on my investment philosophy regarding how to keep a healthy perspective on their portfolios.
Here are five strategies to help you keep a healthy perspective on your investment portfolio:
- Understand how much risk you are willing to take.
A few years ago, I met with a new client to review her portfolio. When I asked her how she felt about the risk she was taking in her portfolio, she replied “I can’t sleep at night worrying about my portfolio”. Her portfolio was more aggressive than she felt comfortable with. So we made changes to the portfolio to put it more in line with her risk tolerance and time horizon.
You need to understand and be comfortable with the amount of risk you are willing to take in your portfolio. In addition, it needs to makes sense based on your goals and time horizon.
- Be well diversified.
According to research, 90% of portfolio performance comes from being properly allocated (stocks bond, and cash) and well diversified; only10 % comes from the individual investment recommendations. Having investments in different asset classes in your portfolio reduces the overall risk in your portfolio.
- Choose quality investments.
In addition to having a well-diversified portfolio, it is important to choose quality investments. Investments paying an abnormally high yield or dividend may be attractive but remember the saying, “if it sounds too good to be true, it probably is”.
- Keep a long-term perspective.
When creating your investment strategy it is important to have a long-term perspective based on your goals and risk tolerance. You will be more likely to stick to a long-term strategy and not tempted to sell investments at the wrong time.
- Focus on what you can control.
Focusing on what you can control is key when it comes to your investments. There a lot of things you cannot control including the market (whether it is up or down) and the economy but what you can control are the first four strategies indicated above. Because there will always be some news headline affecting the market in the short-term, by focusing on what you can control and your long term strategy you won’t need to worry about the day to day noise.
By keeping a healthy perspective on your portfolio, it allows you to focus on what you can control which is a key strategy to investment success.