It’s 2011, and from the perspectives of economics, politics, and investments, the world has become a very strange, volatile, and complicated place. Are you the type of investor who can survive, even thrive, now…and…over the longer term? In other words, are you the right type of investor? Let’s take a closer look.
Basically, there are two types of investors. Type 1 relies on a combination of luck, research, and a curious belief that he or she has “special insights” that most others lack. More to the point, this investor type believes these insights will lead to better-than-market returns. Good luck on that “better-than-market returns” part – there are a lot of smart and highly experienced people with enormous resources out there! In reality, this approach doesn’t work well over the longer term.
Type 2 focuses on important fundamentals such as risk tolerance, goals, asset allocation, cost, tax consequences, diversification, and a disciplined approach over time. All are connected, but it really starts with understanding risk tolerance, goals, and the investment returns needed to achieve those goals. This ultimately drives portfolio structure, also known as asset allocation.
The asset allocation decision determines how much money to invest in stocks, bond, cash equivalents, real estate, alternative investments, and the sub-categories of each. These choices can lead to a portfolio that is very aggressive, very conservative, or…somewhere between those extremes. Remember, as one moves from aggressive to conservative, exposure to stocks generally declines while exposure to bonds and/or cash increases.
Keeping tabs on cost and after-tax returns is also important. That means avoiding excessive trading as well as being smart about tax-efficient investments and tax-loss harvesting.
Let’s not forget diversification. Investment diversification is about variety…having exposure to multiple asset classes that produce different returns…at different times…to different degrees…for different reasons. Done correctly, diversification can lead to lower overall portfolio risk and more attractive returns over the longer-term.
Which type of investor are you? We’d like to hear, so please drop us a line or post a comment.