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Enhancing Investment Performance

When it comes to investing, keep it simple!  The following rules are relevant to every investor and could help better your investment performance.  Small changes to your portfolio can add up to large gains over time.  A disciplined approach and proper diversification will help you stay on track when fluctuations in the financial markets tempt you to make rash decisions and distract you from your goals.  Don’t overreact to market news.  Use these basic rules to help you achieve success in investing.

Basic Rules

  • Get started investing as soon as you can.  Over the long-term, stocks tend to outperform cash and bonds.
  • In addition, look to construct a portfolio allocation based on your risk tolerance, time horizon, and financial goals.
  • Furthermore, make sure your portfolio matches your risk tolerance.  Good portfolio managers don’t manage your portfolio, they manage risk.
  • Diversification is key.  Have you heard the term “Don’t put all of your eggs in one basket”?  This also applies to investing.  No one knows the future.  Therefore, invest globally, in various asset classes, and across different sectors and industries.
  • Stick with your long-term investment strategy and don’t try to time the market.
  • At the same time, make sure you monitor your investments on a periodic basis.  You will want to make sure they’re supporting your short-term and long-term portfolio goals.
  • Consider companies that pay a steady, growing dividend.  These companies tend to be well-managed and have a focus on increasing shareholder wealth.
  • Focus on the income generated by your investments, not the short-term investment performance. Stocks may go up in value and may have periods where they go down in value.  Think of interest and dividends as the rent you receive on your investments even if the underlying security fluctuates in value.
  • Compounding interest is your greatest ally. By reinvesting the interest, going forward you will receive interest on both the initial investment and reinvested interest.  Think of it as interest on interest.  The sooner you begin investing, the longer the money can compound and grow.  Start today instead of trying to play “catch-up”.
  • Likewise, compounding dividends is equally important. It’s so important that we are listing compounding twice!
  • Investment results tend to suffer as trading frequency is increased. Not only is increased trading costly to your portfolio, but this tends to reflect a short-term trading mentality rather than a long-term buy and hold philosophy.
  • Sales loads and commissions, high fees, and tax inefficiencies are a drag on your portfolio performance.  Make sure you explore every avenue to reduce these costs.
  • Finally, don’t be overconcentrated in one stock. Many people may receive their company’s stock as part of a bonus or compensation plan.  While you may believe in the long-term success of your employer, do you really want both your paycheck and your retirement savings to be dependent on that one company?  This could be a recipe for disaster, just look at what happened at Enron and WorldCom.

In summary, it’s never too late to start making changes to your portfolio to improve your investment performance.  Don’t underestimate how these basic changes can have a big impact on the fulfillment of your financial goals.  Make that first step and take control of your finances!

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