Choosing the right investments involves learning about mastering investment basics. Although it may not take a long time to learn how to invest money, it may take an investor years to develop a winning strategy. Prospective investors desiring to create investment portfolios may benefit from the following five suggestions:
Following the 80/20 Rule
Economist Vilfredo Pareto invented the 80/20 rule, which is also known as the Pareto Principle. The rule revolves around the concept that positive results gained from new experiences typically result from making an effort. Most good results occur when a person makes a 20 percent effort. Accordingly, the 80/20 rule also applies to people who invest in the stock market.
Holding Investments for the Long Haul
Knowing when to buy and sell presents challenges to the most experienced investors. Although temptation knocks at the mind’s door of every investor, self-discipline helps a person resist the urge to sell investments on a whim. Accordingly, holding assets for several years is a beneficial strategy, especially if dividends play an important role
Paying Attention to Dividends
Investors who buy mutual funds, stocks and bonds offering substantial quarterly dividends may find that stock market volatility becomes less important. Shareholders holding conservative mutual funds for at least 10 years may find that their assets have doubled. This general rule applies even if they never invested any more money during this period.
How to Pick the Right Asset Allocation
Selecting different types of investments comes under the “asset allocation” category. Allocating assets entails creating an investment plan involving various types of investments. Each investment serves a noble purpose. For example, an investor may choose to invest 25 percent of their assets in equities, 25 percent in bonds, 25 percent in mutual funds and 25 percent in ETFs. Some diversified investors may want to buy real estate investment trusts (REITs) or international stocks.
The Beauty of Diversification
Most financial gurus advocate creating diversified portfolios consisting of stocks, bonds, mutual funds, ETFs, international equities and a small percentage of riskier holdings. How to choose the right investments involves creating a sound plan, resisting the urge to sell shares frequently and choosing investments that reward investors with dividends.