Good Investors Focus Specifically on Creating a Diverse Portfolio

Written by: Peter Tollin
01/29/2020

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Most people who think of investments imagine stock charts and graphs, but investing is largely about using income to generate a return. There are many ways to invest, and most investors try to reduce or eliminate risk to ensure they do not lose their principle investment. Long-term investments are generally better than short term investments because volatility makes it difficult to decide on the right time to buy stocks. There’s a major distinction between speculating and investing. A speculator will make a guess about a stock’s performance. It’s impossible to eliminate all risk, but an intelligent investor will assess the market to make an informed decision about a company. Most people think of stocks when they imagine investments, but investors actually have many different options available to them.

Types of Investments

Investment options include:

  • Stocks
  • Bonds
  • Real estate
  • Index funds
  • Mutual funds

Stocks are essentially a claim to ownership in a business. If you plan on investing, then you should definitely look at the company’s balance sheet and market analysis. If the company has a big competitor who plans on destroying the competition, then it’s not a good idea to invest in the business. You should also look at company’s earnings reports to find more about the accounting. A company might have $1 billion in inventories, but half of it could be milk that will expire in a few weeks. If you’re not sure about the nature of the company, then it’s a good idea to look at analyst ratings. Analysts essentially do the hard work for you, but you should still be careful while purchasing stocks. This advice isn’t guaranteed, and you can only reduce risk by creating a diverse portfolio of different stocks. Investors shouldn’t worry a lot about daily market fluctuations. The important thing to examine is the future economic health of the business. A company may eventually decide to shut down, liquidate its assets and pay the remaining money to shareholders. These estimations aren’t an exact science, but you’ll want to make sure that your investment is worth something in the event the entire business shuts down. You can do this by examining the company’s debt, assets and equity. You don’t want to invest in a company that has more liabilities than assets. Debt can cut into a company’s profits and eventually force the business to file for bankruptcy. Invest in stocks in an intelligent manner, and you’ll be guaranteed a solid return after a few years.

Bonds are similar to stocks, but the returns are much lower. Both the government and private businesses issue bonds to receive cash. The entity promises to pay interest on the bond by the time it reaches maturity. Many people today consider bonds useless, but that’s largely because the stock market has been doing very well. Government bonds are essentially guaranteed, but private businesses cannot pay their bonds if they are forced into bankruptcy. You may want to make bonds a small portion of your portfolio, but they’re not a great investment if you’re looking to make your money grow over time. People in the past purchased bonds to protect against inflation, and the returns on government bonds will always be very low because there’s no risk involved.

Investing in real estate is a fairly complex process, and most people don’t have the time or energy to manage a property. There’s a lot of volatility in many real estate markets, so there are often a lot of ways to renovate and resell properties. If you decide to invest in real estate, then you’ll definitely want to estimate costs before you purchase a home. You typically have to look at closing costs and contractor expenses. If you want to use a rental property for income, then you’ll need to make sure that the rent costs surpass the mortgage rate. If you put more money down, then you will reduce the monthly mortgage payment. You may also be interested in real estate investment trusts. These real estate investments are managed by a firm, so you simply give the business money to claim a portion of ownership. Real estate investment trusts are a great idea if you want to diversify your portfolio with real estate. The risk is reduced because there are a number of different property investments involved.

Index funds and mutual funds are both very similar. An index fund is comprised of many different companies. The risk is automatically reduced because a single business failure will have a minor impact on the share price. Mutual funds are similar. They may contain stocks, bonds and a cash buffer. Mutual funds are managed by a financial expert. Investors pool their money together, and the manager makes decisions for the entire group. This is a useful option if you simply want someone else to handle your investments for you. Mutual funds do not typically beat market averages, but they’re often a safer bet because an expert is reducing the risk for you.

Inflation and Taxes

It’s always important to consider inflation before you invest in an asset. Investing for a two percent gain is a bad idea if the annual inflation rate is three percent. If you invest in the stock market expecting aggressive returns, then you might end up disappointed. The best investors recommend holding onto a stock for twenty or thirty years. The intrinsic value of the company will likely grow as time progresses, so you’ll be able to get a significant return on your investment. Taxes are also something you need to consider. If you are in a higher tax bracket, then you may want to open up a Roth IRA to make tax free contributions to your investment account. Cautious investors are typically the most successful. The average millionaire in the United States earns an average income of $80,000 a year, so it’s clear that you don’t need to earn a lot of money to be wealthy. Invest your funds carefully, and you’re almost guaranteed to get a satisfying return across 20 or 30 years.


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