Becoming A Better Investor: Basics (Part 2 Of 5)

Yesterday, I outlined why I believe the typical investor still feels at odds with how to actually manage assets effectively and proactively.

As the article concluded: “Benzinga’s mission to provide actionable trading ideas for our readers. Over the next four days, this series will look to provide a refreshing outlook on trading and investment strategy. We hope you take this time to take inventory on your assumptions, goals, and alternatives. Maintain an open mind frame, and you might be surprised with the degree of flexibility modern trading affords.”

Our first lesson will cover the basics of holding an asset portfolio. These guidelines will provide you with a game plan to implementing a more efficient trading strategy.

First and foremost: eliminate debt! This cannot be understated enough. Interest on credit cards, student loans, and other payables can easily wipe out any potential profits a great trade may create. Also bear in mind that net worth is defined as total assets net total liabilities. Managing a portfolio will naturally translate to minimising debt and its associated costs, while maximizing return.

Secondly, find a broker that is suited to your needs. It’s recommended that you spend a considerable amount of time hunting for a service-friendly broker that charges reasonable account and transaction fees. Typically, investors prefer to spend a bit more on the broker if it means they are supported by a top-tier provider that has little chance of failing. Bear in mind that every individual is unique, and finding the appropriate broker/trade clearinghouse may surprise you.

Third, challenge the status quo. Investors are advised to invest in everything from options and futures contracts to holding straight cash equivalents with little return. Clearly, there is no defined right or wrong method here. However, this investor argues for the need to diversify and simplify. This equates to:

1. Hold 60% of all portfolio assets in cash and cash-equivalents. These can include gold, money market funds, CDs, savings, Treasury bonds, etc. While there isn’t a huge return on the bulk, this allows for quick allocation of assets should an investment opportunity arise. Further, this eliminates some of the volatility inherent in any market-exposed portfolio.

2. Hold only assets you understand. Don’t know what a MBS is? Don’t invest in it! This is a very straightforward tactic, but it’s surprising how many investors have little to no clue of what they own. Take the time to understand what you want, and whether a given security meets the criteria. Be honest with yourself, as the Apple’s of the world may not be the most effective use of capital.

3. Diversify! This doesn’t just mean stocks v. bonds, domestic v. foreign holdings, or buying index funds. Diversification is a way for investors to minimize the systematic market exposure to their overall holdings, but it must be implemented with far more analysis than is typically given. All potential scenarios must be envisioned and prepared for. If there is another global recession, for example, domestic and foreign equities could potentially fall in unison, effectively eliminating the original intent of global allocation. More time will be spent on this Friday.

4. Challenge yourself to find an anomaly. There is always a mis-priced security in the market, and sometimes it’s the non-financial types that see the greatest opportunities. Allocating a small amount of capital to a potentially sizable return could boost overall portfolio return by a significant margin – be sure to keep this in the back of your mind.

5. Be patient. Generating any return on capital is often slow and tedious. Getting frustrated or emotional at the market is a waste of energy, when more productive time can be spent looking for investment opportunities. This is a especially poignant note in times of uncertainty.

With those main points in mind, it’s clear to see that this investment series is focused on the simplification of portfolio management. It’s argued that the vast majority of investors don’t benefit from advanced portfolio tactics, but a strategy focused on straight capital retention and managed return. Outlined above are the first steps to executing our strategy, with Cash Flows to be the focus for tomorrow.

Agenda: Monday: Introduction; Tuesday: Basics; Wednesday: Cash Flows; Thursday: Reaction Strategies; Friday: Advanced Options

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