The most effective investment strategies revolve around a few simple principles that are easy to follow, repeatable, proven over time and based on facts. Here are three strategies to help keep you on track with achieving your investment goals:
A staple strategy that many investors choose is diversification. When one category is underperforming, another one might be on fire. Having your money in different types of investments helps you ride out market fluctuations, stay focused on the long term and know that your money is working for you.
When choosing how to diversify, start with your investor profile. This will help you identify the right mix of investments for your portfolio. For example, a portfolio may hold a mix of the following basic asset classes:
- Cash and cash equivalent investments provide a stable base for your portfolio, as well as supplying liquidity for you to tap into on short notice.
- Fixed-income investments generate cash flow and can provide stability to help protect your portfolio from volatility.
- Equities provide the greatest potential for long-term growth and protection against inflation.
Each asset class can also be diversified regionally and across different sectors and industries.
- Consider dollar-cost averaging
Put simply, dollar-cost averaging involves buying a fixed dollar amount of a particular investment on a regular schedule.
Like the proverbial death and taxes, you can count on financial markets going up and down. When prices are high, your fixed dollar amount buys less of the investment. When prices are low, your money buys more. This helps to even out the effect of volatility and may reduce your average cost per share or unit.
This strategy takes the uncertainty out of deciding when to buy. It’s also great for helping you be disciplined about socking away funds with regular contributions.
- Monitor and rebalance as needed
When market movements cause your asset allocation (the asset mix you developed based on your investor profile) to stray away from your target, it could be time to revisit your plan. Outperformance or underperformance in certain asset classes or specific holdings can impact your asset allocation – exposing you to more risk than you’re comfortable with or causing you to miss out on opportunities for growth. Regularly balancing the right mix of cash, fixed income and equities in your portfolio can go a long way to successful investing. Many investors rebalance at least annually.
How often do you do it? As mentioned above, at least once a year — more often if necessary — depending on your situation. Consider making an appointment in your calendar to take a look at how your investments are performing and make any adjustments.
Source: RBC Direct Investing