The truth about investing is that what most people need for an abundant life, an abundant retirement, is very easy to understand, but not so easy to put into practice. Unfortunately, most of the financial industry advertises that investing well means intellectually understanding arcane knowledge, mysterious charts, or the proclamations of gurus. Here is what actually works:
1). Diversification
As everyone knows, it is best to avoid putting all your eggs in one basket, or putting all your money in one stock or one bond. But it is also important to spread your wealth into many different asset classes, including small and value stocks, all of the world’s markets, and low-risk bonds. The markets can move in ways no one expects, and diversification is the wise response to an unpredictable world. Through effective diversification, you can lower the risks your portfolio faces while increasing the expected returns.
2). Understanding Risk Tolerance
All investments carry some sort of risk, and the risks can be short or long term. Diversification reduces but cannot eliminate risk, so it is crucial to achieve clarity about how much risk you can take. On the one hand there is the risk you can economically afford to take, and on the other hand is your psychological tolerance for risk. The key is to balance your risk tolerance with the goals you have for your portfolio.
3). Staying the Course
A good portfolio is a good start. Maintaining the portfolio requires the discipline to keep the portfolio in line as long as your goals have not changed, regardless of what the various markets do. This often means selling some of your riskier assets, like stocks, when they go up, and buying them when they go down, according to a pre-determined plan. This process, known as rebalancing, is emotionally difficult but necessary in order to stay on target.
4). Avoiding Mistakes
Unfortunately, most of the mistakes investors make are encouraged by too many in the financial services industry:
Fee-based investment management and hourly fee planning are offered by W Curtis Erickson, PS Inc. dba -Erickson Wealth And Tax Management, CPAs and a Washington State Registered Investment Advisor.
