Taking a systematic approach to investing is key to becoming a better investor
Becoming a better investor is not about how much you invest. It is more about creating a solid investment plan. Here are seven steps to help you create a better portfolio and help you become a better investor:
- Know your “why”.
The first step to investing is to know “why”. You should have established a long-term investment goal such as planning for retirement. If you anticipate needing the funds sooner than 5 to 7 years, then the funds should not be invested.
- 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; only 10 % 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 five 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.
- Partner with a financial professional.
If you need additional support, consider partnering with a financial professional. There are three key benefits of having professional advice in establishing an investment plan once your financial plan is in place. The professional can:
- Build a portfolio tailored to your needs and goals
- Help you understand the risks
- Adjust your portfolio and investments when necessary
- Help you keep a long term perspective
- Stay Informed and Engaged
By staying informed and engaged, you can empower yourself with the knowledge to make good financial decisions. In addition, goals and priorities sometimes change, so it is important that you review your investment plan on an annual basis and when you have a key life change. This process will help you stay on track to meet your long term financial goals. Not only should you review your investment documents such as your brokerage statements, annual reports, etc., you should also consult with your financial planner when you have questions.
Start educating yourself financially. If this seams daunting to you start by reading something financial related each day, i.e. an article from a magazine, newspaper or website.
Whether you are new to investing or have been investing for a while, incorporating these steps into your process can go a long way towards helping you to become a better investor.
If this post resonates with you , please click the like and share buttons below!