Here’s why you want to go beyond building a diversified stock portfolio and why you should invest in good mutual funds.
Are you a prudent investor? If you are, then you’re bound to practice good asset allocation. This means that you have worked to create and develop an investment portfolio that’s diversified and well balanced, such that your funds are allocated across various asset classes. This is what many investors do in order to control risk when they invest.
Let’s Review Asset Allocation
Asset allocation is a strategy that an investor performs in order to distribute their investments out among the different types of investment classes such as bonds, stocks or cash. Some popular asset classes that most investors end up investing in are the following:
- Bonds
- Cash
- Foreign Currency
- Collectibles
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Commodities
- Precious Metals
- Real Estate
- Stocks
The practice of diversifying your long term funds among all these investment categories does a lot to control the risk of loss. The reason for this is because the investment performance (or rates of return) of these asset classes are not well correlated: when one category is performing poorly, another may be doing well, thereby balancing out the total returns and performance of your overall portfolio.
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Looking to day trade? If you are, then there are some things that you need to keep in mind before you get started. That way you can make the most out of your day trading activities as much as possible, if you choose to take that route. Some things to keep in mind include being realistic about your goals, knowing the basics of stocks, and having the right mindset without emotion getting in your way.
Want To Day Trade? 6 Tips Before You Start Trading
1. Be realistic.
When you’re realistic about something, you keep yourself grounded and level headed. If the outcome exceeds your expectations, then great. Isn’t it much better to be surprised when an investment turns out better than what you expect, rather than to be horribly disappointed when you’re unable to meet unrealistic goals?
In other words, know that when you invest today, you won’t automatically become rich tomorrow. Trading and investing are not get rich quickly schemes — they involve training, experience, education and practice. Good returns take time, so you’ll need to be patient.
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When you diversify your portfolio, you are making your money work for you in the best way possible. When working with your portfolio, diversification achieves one important thing: risk management. By diversifying, you are able to spread the risk around within your investment portfolio across various asset classes.
Know Yourself and Invest For Your Goals
When you invest, have your financial goals in mind — are you investing for the short term or the long term? You should also know how well you can stomach risk and how comfortable you are about investing in certain equities and other assets. Also realize that you are probably not going to be the next Warren Buffet, but that you can earn a decent amount through your investments.
One thing to keep in mind is that you should not overextend yourself when investing. Don’t get too excited and then purchase a bunch of stocks simply because you “feel good” about them. Investing takes time, strategy, planning and research. You also need to keep an eye on your portfolio on a regular basis so that you can make informed decisions about the best times to buy and sell. If you have too many stocks to follow, then you may find yourself overwhelmed. And you may feel more overwhelmed when you notice that you are not making any money. Experiencing losses in the market may exacerbate your nervousness or frustration with investing and may cause you to make bad moves. Be careful that you don’t fall into this trap!
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Welcome to our financial roundup! I have here a nice collection of interesting posts from around the blogosphere which I thought you may enjoy:
Darwin’s Finance: Wonder how stock options work? Well check out this article that gives us the basics on how to trade calls and puts.
Man vs Debt: Now this is a really unique post about the power of resourcefulness. What does being resourceful do for you? Plenty. It’s a trait that’s often necessary for helping you get an edge in life.
Wealth Pilgrim: This post discusses how you can solve a problem that you may never have thought you could by putting your mind to it and asking for help. At its core, this post is actually about toilet repair, but there are some lessons to be learned here, especially if you aren’t a DIY type of person.
Personal Finance By The Book: More on the subject of DIY (do it yourself) — you can save thousands by buying or selling a car on your own rather than by going through dealers.
I Joined These Finance Carnivals!
These were some of the money carnivals I joined this week, so if you’re in the mood for reading more about finance and investing, do check them out. They’ve got lots of informative and educational articles that will pique your interest.
Watching my 401K balance continue to drop makes me sick to my stomach such that I’ve begun to consider trying my hand at timing the market. I’ve always had a bit of gambler’s blood in me and wonder if I could conceivably learn how to trade successfully without losing my shirt. No doubt, there are benefits and many pitfalls with day trading and market timing when compared against long term investing, but the ultimate goal is the same: to make money. So I’d like to take this opportunity to investigate these investment strategies to see what will ultimately make sense for anyone who’d like to make money in the market. How should I approach the stock market?
Day Trading vs Long Term Investing: Exploring Investment Strategies
The volatile nature and quick liquidity of buying and selling on the same day is what excites and appeals to most day traders. The thought of a quick substantial increase (in paper profits) is very tempting and gets the blood surging. I have to admit, this is something I’ve been toying with for a while, and the more I hear about forex trading, the more I’m intrigued. But our losses can materialize as easily and quickly as our profits, and if we don’t have a complete understanding of the market and its conditions, we can lose everything in an instant. Expecting to make money on every trade is unrealistic and we must fully understand what we are doing.
While the emotional part of myself is interested in the possibility of learning how to trade stocks and foreign currency, my sane self knows that this is something I should not take lightly. That’s because I understand that long-term investing is what makes sense to most of us, and frankly, it’s what I think that average investors should ONLY think of doing. Especially those young enough to be able to really see the rewards of their initial investment.
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I believe that the best way to start investing is with index funds. They’re particularly great for new investors since they take the guesswork out of where you should put your money. After all, an index fund simply mirrors how its respective stock market index behaves; by taking a look at the behavior of the S & P 500, Dow Jones and the Nasdaq index, you’ll have a great idea about how your money will do if you happen to invest in funds that reflect their make up.
Most fund managers will try to beat the index, but unfortunately, too many of them fail. As consumers, it’s reasonable for us to expect to earn a rate of return that matches the index since most experts we entrust our money to simply cannot beat market returns consistently over the long term. If you’re somehow able to manage market returns, then you’re doing much, much better than what most professionals are able to achieve with their managed funds. Now it’s ironic that this is the case since index funds don’t have managers like actively managed mutual funds do. This means that the overall cost of having an index fund is going to be cheaper for you because there is no manager that must be paid.
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When you invest in the stock market, you’ll need to be aware of the investment risks. It’s also quite important to invest with your eyes open: to make sure you do enough due diligence before buying equities and putting your money to work in the stock market. While you are making your money work for you, you’re also exposing it to some risk after all. So tread carefully: do the research needed to pick the right stock investments. Now because there are so many stocks in the stock market universe to choose from, making investment choices can sometimes be rather daunting.
Should You Buy Individual Stocks?
If you do decide to pick individual stocks for your investment portfolio rather than to invest in good mutual funds, then you’ll need to be aware of the process involved in making stock picks. First, you must decide what you want to invest in: are you looking at a specific stock sector or company? There are several factors that you’ll need to look at:
1. Check stock and company performance.
When you’re evaluating a stock, check out its company’s performance in its given industry (or space); and also check on the historical performance of the stock itself. Check the following measures carefully:
- The stock’s P/E ratio (or price to earnings ratio) which tells you just how overvalued or undervalued a stock happens to be.
- The stock’s dividend yield, price-to-book and price-to-sales measures. Higher yields make a stock more attractive.
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In the world of investing, there are all sorts of mutual funds — from index funds, to actively managed — covering the spectrum of size and orientation. Now no one wants to invest in a mutual fund that loses money on a consistent basis or is charging you a lot of bucks for below average market returns. So the question here is, what makes a mutual fund “good”? What makes a fund worth the money that you are going to put into this investment? Here are a few characteristics you’d like to check out when shopping for a mutual fund:
Attributes Of A Good Mutual Fund
1. The fund’s mutual fund manager has a strong reputation.
When you invest in an actively managed mutual fund, you’ve got to check out the guy or gal who’s at the helm. This fund manager’s goal is to outperform the market and to come out on top of the competition. When the fund is a winner, investors tend to pour more money into that fund, possibly chasing returns (or hoping they’d receive the kind of returns expected of a fund with a great performance record).
You’ll know a mutual fund is a great choice if the fund manager controlling and managing it has a great reputation and a good track record. If you read up on some financial publications, these funds are written up front and center as top favorites.
2. The mutual fund has low expenses and low overall costs.
Check whether the mutual fund is a no load and has no 12 B-1 fees. Why bother with loaded funds when you can now own a well performing no load fund that’s so much cheaper to own? Take a look at the expense ratio of the mutual fund. This is what tells you how much it costs each year for you to invest in the fund. Furthermore, you can compare this expense ratio to the cost of other funds.
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