Before you start investing you should define your financial goals and your risk tolerance. Regardless of whether you want to quickly gain capital or if you want to secure funds for your retirement years, following these five rules will help you develop a successful portfolio and achieve your financial goals.
1. Diversify your portfolio
Diversification is rule number one when investing. The idea is to develop a portfolio that includes the more common investments such as stocks, bonds and commodities as well as alternative investments such as real estate, art and even cryptocurrencies. This way by combining the different asset classes with different risk profiles you can improve the risk return ratio and increase the overall profitability of your portfolio.
2. The 20% rule
The 20% rule was created by the Chief Investment Officer of the Yale Endowment more than a decade ago. Today a number of investors and investment companies across the globe, including Blackstone use this rule. It states that unlike the traditional portfolio comprising a mix of stock and bonds, a portfolio that includes 20% of alternative investments can not only increase the return potential, but it can simultaneously reduce the portfolio risk thanks to the low correlation that alternatives have with traditional investments.
3. Invest in the long-term
Just like the high risk investments, long term investments usually offer better return. The reason is that liquidity has its price. The liquidity represents the ability to quickly buy or sell a certain asset on the market without affecting its price. Meaning that by choosing a long-term investment you save on the price of this liquidity.
4. Follow your plan
Develop a comprehensive plan and follow it. First, decide how much of your funds you want to invest in long and how much in short investments. Then think about the ratio of your portfolio. Research the market and the different viable investments. Don’t forget the alternative investments that not only diversify your portfolio in order to limit the effect of market volatility, but also increase its return potential.
5. Adapt to market changes
Let us say that your portfolio comprises of 80% stocks and 20% bonds. This asset allocation is made on the basis of your plan, financial goals and the risk you could bear. For example, if the market shows signs of regression and stock prices start to fall, you can change your strategy and decrease the percentage of stocks in favour of the bonds in your portfolio. This in no way means that you are not following your plan, but on the contrary – it shows that you are prepared to respond to the market changes.