Are you ready to invest? Make your market moves before the market does.
I’ve always had a hunch that I had a medium risk investor profile, even before I took a risk profile test or two. Well it’s been confirmed that I’m most comfortable with a moderately aggressive portfolio, which means I can possibly stick with a solid mix of stocks and bonds without flipping out during rocky market periods.
Though my stomach was tested recently, the constitution of our general investments coupled with my relatively optimistic expectations of where the market was headed, allowed me to relax throughout the volatility.
I’ve had some friends who’ve expressed concern over steep one day stock market drops, who’ve asked me what they should do during such volatile periods. I’ve heard people simply asking: Is this a good time to buy now?
Hopefully, I can answer those questions by sharing with you some tips on how I’ve handled my own investments.
5 Tips To Create Your Investment Plan
#1 Do not react to the market. Be proactive instead.
Make your investment moves before any major market action takes place. It’s best to have a good plan on paper before executing it, and it’s best to execute it during a time when the market isn’t dancing around wildly. Get the answers to these questions before you invest and make it a part of your plan:
- What are your investment goals?
- What is your risk tolerance? Evaluate yourself or take some tests to find out!
- What is your time horizon?
- What does your tax situation look like?
Replies to these questions can help point you to the right types of investments. Anticipate some possible market moves and know what you’ll do before something big happens!
#2 Take investment positions in your portfolio when the market is stable or depressed.
Whenever I build a position in my portfolio, I always try to do so when the market is level or weaker. I prefer not to buy during strength or powerful up days and I definitely try not to chase returns. That isn’t to say that buying while the market is going on strong is a bad thing or even a wrong move since momentum can certainly take you far. In the long run, it may not hurt you to buy during an upswing. But I tend to be a contrarian and I like capitalizing on weakness, where there could be more opportunity. Others may disagree with me but this is what I’m comfortable doing. In investing, you can certainly make money through different investing styles, and I’ve so far stuck with what’s worked for me.
#3 Create a core diversified portfolio.
Build a strong foundation for your investments by creating a diversified portfolio of your core holdings. You can do this by assembling your own portfolio by choosing mutual funds and ETFs across various conventional asset classes such as equities, bonds and cash. Figure out what types of asset classes you’d like represented and what percentages they should represent in your mix. Then settle on some good fund families with experienced managers and purchase shares in their funds. Take note of the management style, fees, tax ramifications, performance history and actual securities in the funds you consider. Such a portfolio needs to be in line with your risk profile so you can sleep well and be assured you’re doing the right thing.
#4 Add some ooomph to your portfolio.
Maybe you need to try some hedging techniques. Maybe you need to develop a portfolio that includes alternative asset classes to add more diversification. This can be achieved by adding negatively correlated asset classes to your mix. You may need some expert help when trying this out, so research and learning are key when you’ve decided to go this route. I’m in the process of researching options in this area myself. For now, I’ve started by reviewing material from other personal finance blogs and educational investment sites to learn how to tackle investments beyond the standard equity/bond combinations.
#5 If you’d rather not create or self-manage your own portfolio, buy into a preassembled one. There’s quite a number of mutual funds out there that can be considered as “one stop shops”. The purpose of such funds is to try to take the guesswork out of selecting diversified investments by keeping strict allocations that in some cases, conform to targeted timelines (depending on the type of fund they are). Some examples are:
- Balanced Funds (aka Hybrid Funds, Asset Allocation Funds)
- Life-Cycle Funds (aka Target Retirement Funds)
However by settling on such funds, you lose flexibility and control over your investments for by definition, the funds do their portfolio shifting on their own. So be aware of these caveats when buying into these funds; remember that you’re buying convenience and hiring someone else to worry about your allocations for you.
With these ideas, you should be on your way to starting your own investment plan. The bottom line? Have that plan BEFORE you make your moves or dip your toes in the market so that once the market behaves like a wild beast, you’ll know how to ride it.
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#2 sounds a little like contrarian market timing to me; I never felt comfortable with that, so I tend to spread risk out by dollar-cost averaging. What’s your take on that approach?
Most of what’s said is pretty standard personal finance wisdom; however, it’s all focused on stocks, bonds, mutual funds and the like. I would just like to mention that these are not the only things you invest in.
I’d suggest that before you try and decide what you’d like to invest in, first determine what an investment is. I’d submit that an investment is anything that lets your money earn more money for you. This can be through stocks, bonds, mutual funds, real estate, or even a vending machine business.
I just don’t think we should limit ourselves to stocks and bonds. Try to think outside the box a little and you’d be amazed with what happens.
-limeade
http://fiscalmusings.blogspot.com
Thanks limeade,
#4 should take care of the other asset classes and thinking outside of the box. At least, that’s what I wanted to impart. Anything that negatively correlates to stocks/bonds and the usual conventional investments would be great to add to your plan.
Early in the article is the statement “can possibly stick with a solid mix of stocks and bonds without flipping out during rocky market periods”.
Does the test you used to determine your risk profile apply across asset classes? Most discussions and surveys seem to focus on a mix of stocks and bonds. Many times the people who design the tests sell such things.
As you replied to another person there are other asset classes. Almost as if the standards ones are stocks and bonds and the others are for when you thinking outside the box (rather than stocks and bonds being out of box thinking).
Assuming there is some bias in the tests for risk any thoughts as to how to determine a risk profile for something beyond a listed security?
I always viewed risk as mostly coming from lack of knowledge. Any market risk being magnified by ones lack of knowledge when you consider options where you have not invested the time to come up the learning curve.
John Corey- Real estate investor, 20+ years – multiple states and countries.
Check my blog – http://johncorey.wordpress.com/ – advice for real estate investors.
I just invest normally. If I had extra at the beginning of the month I would have dumped it in. But other than that nope.
Don’t forget that the one-stop shops you mention in point 5 come with a cost. It’s important to evaluate the fees they’re charging – and look for the lower-cost options.
I think the first question to ask is 1) Do you have your own side business? I have found that the best investments I have ever made were in my own business or the business of close friends as partners or loan arrangements. We often hear how important it is to invest in the stock market but rarely do we hear about investing in our own business.
Start a side business and invest in it. The return will be far greater than any stocks (which are partial ownership of someone else’s business that you have no control over).
Admittedly it is more work, but it can also be more fun.
Plus from a stock market standpoint, we are probably facing a lost decade where it goes nowhere for over 10 years. P/E ratios are not where bull markets begin but rather where bar-b=ques normally start. The bull gets slaughtered and fed to the market. Check out John Mauldin and his 20 year bear article.
Very eye opening if you have never studied this type of information. Good luck with everyone’s investments.
Be purposeful. Be passionate. Be Wealthy!!
I was wondering if you would recommend investing in companies you deal with everyday. For instance if you always eat at Subway, invest in it.
At my last job when I was sorting out my rsp they told me I was a medium risk investor and I am getting about a 6%+ ROI which I consider okay. When it comes to stocks I am a big favorite of not just trying to predict the market but going into genres I am personally interested in and know about, this way I am constantly aware of what is going on and can see trends.