4 Fundamental Rules that You Can Apply to Your Investments


  1. Determine your investor profile – Who are you as an investor? What are your investing goals? Below is a chart of things to consider as you study your investor profile.

Factors that Determine Your Investor Profile:

Tolerance Capacity
Time Horizon Stage of Life
Investment Experience Lifestyle
Background Liquidity Need
Values General Financial Situation

Knowing and understanding who you are as an investor should be the foundation for your portfolio. This can also be found by completing a Risk Tolerance Questionnaire. These types of exercises force you to take a look in the mirror and self-evaluate who you really are as an investor. Your goal here is to build a steady plan of action that will help you stay the course over the next 30 to 40 years.

  1. Allocate appropriately – Once you have determined who you are as an investor, you then need to allocate appropriately. This means to simply place your funds in bonds, equity, or annuities in such a way that it meets the level of risk that you are willing to take. Determine the appropriate blend and plan to stay on that course over a period of time that best fits the season of life you are currently in.
  1. Reallocate Tactically – As the stock market fluctuates, you may rebalance your funds to correlate with your investor profile. Staying true to yourself as an investor is key to long-term planning and can have tremendous effects on your long-term portfolios.

A disciplined approach removes emotion from the decision making process. According to Dalbar’s 2003 update, their studies showed “that investors continue to chase investment returns to the detriment of their pocket books. Motivated by fear and greed, investors pour money into equity funds on market upswings and are quick to sell on downturns. Most investors are unable to profitably time the market and are left with equity fund returns lower than inflation.” ⁱ

  1. Do Not Go with The Flow – Do you remember what you told your friends in 2008? “I think the market is going to zero!” “I can’t stand this anymore; I’m pulling out!” As human nature would have it; we are all emotional creatures in some fashion. The money you have worked hard for; you don’t want to lose. This reaction is completely normal, but be careful, don’t allow fear and greed to motivate you. Looking back at historical research, 2008 was an awful time to sell out. Without a strategy, a plan, and proper diversification upfront, it’s hard to resist that natural temptation of selling out at the wrong time.

In conclusion, do you have a plan? Do you have these four elements as part of what you’re doing? If not, you need to seriously consider the factors at hand so you may have growth that can outpace inflation and risk that you can tolerate. Do your research to ensure you’re comfortable with your decisions and seek professional help when needed.

Source: ⁱ http://www.schulmerichandassoc.com/Dalbar_Study.pdf

Brandon Christy is part of the GovLoop Featured Blogger program, where we feature blog posts by government voices from all across the country (and world!). To see more Featured Blogger posts, click here.

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