What's The First Rule Of Investing? It's Not What You'd Expect
When the markets are up, everyone is excited about. When they are down, not so much.
As a seasoned investor (I’m talking decades) and student ofresearch, I've learned it is a fact that long-term historical returns average about 9% per . That looks enticing given the anemic returns on today. in has proven to be an excellent way to build over the long .
So, what is the first rule of? Some might say it is this: take your to a local and buy 100 of a top performer. But is that really wise?
According to stockpickr, a 2012 top S&P 500 performer was Bank of America (NYSE: BAC). Does this you should rush out to buy shares in Bank of America? Before you up your laptop, realize that BAC was among the worst performers in 2011. Are you certain that it continue its upward movement?
Picking the top performers of last stock was a great performer last , it’s likely to sport a frothy valuation. Bank of America has a price/earnings ratio of 40. Do you really think that one dollar of BAC’s earnings is worth $40?is not the recipe for success. First off, if a
When a stock is a top performer one, its price gets bid up to unreasonable levels and it becomes . So, picking a top performer last is not the first rule of .
Then what is the first rule? Before I tell you, consider this:
Given the recent upswing in stock prices, the pull is to get in and start picking index fund this week. Since markets are volatile, after a big run up like that of the past four and a half it’s normal to have a .or . Your mind is telling you not to sit on the sidelines or you miss out. Let’s look at a very real scenario. You take $5,000 and it in a diversified stock
Flash forward to the end of 2013, and imagine your stockhas declined in value to $4,000 for a 20% loss. you be so upset that you sell and take the 20% loss in order to avoid further pain? you be afraid that the value of your continue to decline? Do you know how you react? Because that's the first rule of : Know your risk tolerance.
In any one stocks have a drop of the same amount in one . If you cannot stay invested throughout the ups and downs, your returns suffer. The research is clear: Trade more often and reap lower returns., your can go up from a few percent on up to 30% -- or even higher on occasion. That’s not a problem. The is when
You must know your risk tolerance before you begin market decline, then you are very . In that case, having a large proportion of your portfolio in individual stocks or stock may not be for you.. If you lose sleep and jump to sell at any sign of a
So how do you determine your risk tolerance?
There are many risk quizzes available to help determine what percent loss you can tolerate in your portfolio without rushing to sell. Examine your prior reaction to market declines. If you cannot sleep when your equities. If you can handle only a small decline, such as 5%, then create a portfolio toward and and lighter on the equities.decline, then you don’t want 80% of your portfolio in
If there is a long time until you need your invested assets and you can weather a drop of 15 to 20%, decrease your ramp up exposure to the stock markets.and and
This moderately aggressive portfolio has two thirds invested in diversified stock bond fund. The U.S. stock and the international stock great but little protection against international stock market corrections. In a steady-interest-rate environment, the inflation-protected against some of the stock market volatility. This portfolio is for someone who is less .and one third in a Treasury -protected
If you are prepared and informed about the potential downturns in the market -- and you can stay invested -- you are on the path to becoming a successful investor. If you cannot tolerate periodic losses or are approaching retirement, stick with a portfolio weighted toward Government I , and conservative .