Managing your own portfolio comes with a lot of challenges. Our ten key questions can help you to invest wisely.
Is there a shortcut to high returns?
New investors often have unrealistic expectations about the returns they will achieve. Chances are, you won’t get rich overnight. But you can increase the value of your investments slowly by giving them time to perform.
Can I time the market?
It’s crucial to have a clear investment strategy in place that takes into account your financial goals. But, most importantly, you must give it time to deliver. If you’re making a lot of short-term changes, you might be trying to time the market, which could prove disastrous.
How much risk should I take?
Making a clear decision about how much risk you’re prepared to take (and sticking to it) is crucial to ensure your investments are suitable. If you take too much risk, your capital could be eroded quickly, too little risk can mean that your money isn’t working hard enough. How much can you really afford to lose? When markets fall, it’s important to guard against behavioral biases that can creep in.
How often should I monitor my portfolio?
Failing to monitor your portfolio and react to important market events can wipe out potential returns. While buy and hold is generally the preferred approach, this doesn’t mean being inactive. If you choose your investments and then simply ignore your portfolio for years, how can you be sure it still meets your needs? Your financial goals are not static, and your portfolio should adapt to your changing requirements.
How do I spot a good thing?
It’s easy to get caught up in trendy market sectors that appear to promise exceptional returns. Sadly, investors can find they get burnt by having too much exposure to volatile, speculative assets. This is why there is no substitute for fundamental research and really getting under the skin of all potential investments.
Can I put all my eggs in one basket?
It can feel more comfortable to invest in the markets you know and understand. But don’t forget the golden rule of investment: make sure you’re properly diversified across markets, asset classes and sectors. Savvy investors prepare for different scenarios that can move asset prices, such as rising interest rates. Avoid a home bias and try to have a broad spread of assets to reduce correlations during times of market stress. This reduces the likelihood of seeing all of your investments drop in tandem if certain markets fall.
Where can I find good value?
Paying out too much in fees can eat into returns, so making sure you’re getting good value for money is crucial. This does not necessarily mean finding the cheapest fund, administrator or even wealth manager out there, but rather making sure they offer customer service or performance that is worth paying for.
When is enough, enough?
It can be painful to realize a loss on a trade that hasn’t worked out as you hoped. In fact, behavioral finance experts suggest we feel the pain of a loss twice as strongly as we feel the buzz of a winning trade. But sometimes it makes more sense to draw a line under your mistakes before things get worse. Think of the loss as a valuable lesson. Hanging on to an underperforming investment can do more damage to your portfolio.
Do I follow the crowd?
It rarely works out well if you follow the crowd when investing. Successful investors are more likely to be contrarians, who hold their nerve and buy assets when they’re cheap because they’re out of favor with the rest of the market. They ignore "market noise", preferring instead to objectively assess the value of the asset.
Should I go with a hunch?
Some investors believe they have a gift for predicting market directions. They invest based on hunches and intuition, rather than a clearly defined plan. Although they might get lucky from time to time, relying on sentiment is unlikely to deliver sustainable returns over the long term.
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