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Whether you’re a risk-taker or take a more moderate approach to investing, choosing the right mix of assets is essential. But it’s surprisingly easy for even seasoned investors to get carried away by emotions, especially in turbulent market conditions. But economic changes are normal and illustrate the need to diversify your portfolio.
“Diversification is about investing in different assets that don’t always move in the same direction, because if everything in your portfolio goes up at the same time and at the same speed, chances are everything goes down at the same time,” says Luis Sanchez, managing partner at Greater Wealth, a fee-only financial advisory firm.
Since every investor’s goals and risk tolerances are different, here’s how experts say you can choosing the right investments.
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How to Know If You’re Choosing the Right Investments, Experts Say
Since every type of investor is different, there are many types of “good” investments.
“Choosing the ‘right’ investment depends entirely on the investor,” Sanchez says. “Each investor must determine what they hope to accomplish with their investment portfolio and the level of risk they are willing to take.”
Find the good type of investments According to Christopher Roberts, a chartered financial consultant and principal advisor at Horizon Advisers, it’s less about specific assets and more about how those investments fit into your individual plan.
“It’s critical to let a financial plan dictate investment choices rather than letting investments dictate the plan,” Roberts says. “A comprehensive financial strategy considers an individual’s goals, risk tolerance, time horizon and personal circumstances, and guides them toward investments that are appropriate for those factors.”
For example, if your goal is long-term growth, Roberts suggests you consider stocks and equity funds. If you want regular income, he recommends bonds and dividend-paying stocks.
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Take the time to evaluate different assets and securities
Before adding different investments to your portfolio, think about what they offer, experts say. After all, risk varies not only depending on the type of investor you are, but also Or you are in your investment journey.
“A younger investor may be more adventurous and want to get the best possible returns without considering portfolio volatility,” Sanchez says. “A retiree, on the other hand, [might] “People are more concerned about generating a steady income that they can rely on to fund their lifestyle. Different types of investments will help achieve different goals.”
Take the time to research potential investments, just as you would any other purchase. Your investments deserve the attention and effort you might put into buying a new kitchen appliance or a car.
“You need to look at the historical performance of the investment, the associated fees, the liquidity and the diversification potential of the portfolio,” Roberts says. “By understanding these elements, you can make informed decisions that support your financial plan.”
Also, don’t forget about alternative investment assets
Stocks, bonds, and cash have been and remain some of the most popular traditional investment assets, but they aren’t the only options to consider. You can also consider alternative investments, such as real estate, cryptocurrency, art, and collectibles. There are also assets like gold which can offer a range of unique benefits that you may not find elsewhere.
“The main advantage of alternative assets is that they tend to have a low correlation to traditional investments,” says Rachael Burns, CFP and founder of True Worth Financial Planning. “By including more diversified investments that don’t all move up or down in unison, you theoretically reduce overall risk.”
But while gold and other alternative investments It may make sense to add assets to your portfolio, but it is important to continue to seek the right balance. It probably wouldn’t make sense to move all your money into alternative assets, for example because you no longer have a truly diversified portfolio.
“Some people want to avoid the risks inherent in the stock market and invest all their money in alternatives that they consider safer,” Burns says. “However, concentrating your money in a single alternative investment area can be much riskier than keeping it invested in the stock market.”
Burns notes that in many cases there may be safer and more profitable ways to invest in alternative assetshow to focus on gold mutual funds or index funds.
“Unlike traditional stocks and bonds, alternative assets often have different performance drivers, which provides an additional level of diversification,” Roberts says. “By including a portion of investments in alternative assets, you can improve a portfolio’s stability and long-term growth potential.”
But, like Burns, Roberts agrees that too much of any one thing could be harmful, because commodities, including gold, are highly volatile and not always suitable for all investors.
The essentials
It can be difficult to ensure that the money you invest is well spent, but for most investors, the extra time spent researching pays off in the end. Choose what works for you, even if it’s not exactly what works for other investors. “There’s always a balance between maximizing returns and managing risk,” says Sanchez.
