What Successful Investors Know: Three Investing Essentials
Posted by Mike Lanway on Fri, Oct 14, 2011 @ 04:42 PM
The three investing essentials to being a successful passive investor are:
- Invest in stocks and bonds - You’ve got to have stocks as a part of your portfolio if you want real growth in your account; the stock market is the greatest wealth creation tool mankind has ever had. But you also have got to have bonds in your portfolio in order to have quick access to cash so that you can buy more stocks when share prices are down. More on that in just a minute …
- Diversify globally in as many unique holdings as possible – The stock market is a global market, and like it or not, you have to invest as globally as possible to gain real growth on a consistent basis. Not long ago, people like you and me paid little attention to what was happening to the economies around the world. The only time that I thought about Greece was in history class or when buying a gyros sandwich at a street carnival.
But now it matters! And you better be in the game as much as your platform will allow. Get holdings in as many countries and in as many unique companies as possible.
- Rebalance your account as often as prudence will allow – What’s rebalancing, and who the heck is Prudence?! Haha! Well, prudence is defined as good judgment, and rebalancing is just that: good, prudent judgment. Rebalancing is the act of maintaining the percentages of each individual asset. If the C Fund is at 28% when it is supposed to be at 25%, then C Fund shares are sold until it is back to 25%. That’s called selling high, relatively speaking. Then the profit from that sale is used to buy more shares of the I Fund, because it’s at 12% when it is supposed to be at 15%. That’s called buying low, relatively speaking.
Rebalancing allows you to do two things: maintain the integrity of your portfolio, and gain additional shares from selling high and buying low. That’s good judgment, no matter what name you use!
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Now let’s put it all together - In order for rebalancing to work, you’ve gotta have access to cash and real diversification in your portfolio. The more diversification you have, the more likely it is that some assets can be sold high and other assets can be bought low. On the occasions when everything is down, your access to cash will enable you to buy stocks when shares prices are low.
Remember, the name of the game for the successful passive investor is to accumulate more and more shares. The more you have, the better off you’ll be. That is why we ask the 20 Must-Answer Questions for Investors' Peace of Mind; read through the questions and see what else you need to know to be a successful investor.
More on this next week!
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We are here to give you the confidence you need to have the success you want!
Have a great weekend,
Mike