Picking the Right Investments

Last week I spoke about stocks vs funds and which to choose as part of your investment portfolio. Of course once you have made the decision on what route you are going to take then comes the even big decision – what stocks/funds to buy?

So if you have your crystal ball now would be a good time to take it out and gaze into for guidance…..the point is no one or nothing will be able to tell you where you will make a guaranteed return but you can do certain things which can help you make good educated choices which give you the best chance at a solid return.

For the average investor I would almost always recommend a portfolio made up of funds – they are run by professional managers who buy and sell stocks for a living, giving you the time to focus on what you do for a living. They are also well diversified across a range of stocks often upward of 100. Of course if some is keen on having individual stocks I would suggest only a small percentage – almost like a gambling fund which allows you to have a crack at things yourself.

The first step is to think about what you want to achieve – how long you want to invest for and what sort of return you are expecting each year. Coupled with this you need to consider how much risk you are willing to take. But how do you decide what is too much risk? Well think of it like this you have you money sitting in the bank earning very little (maybe 1% or less in some places) this is no risk but you earn very little in the way of a return (technically you could be losing depending on factors such as inflation) on the other hand you could be invested in a company that heavily involved in a new technology that has massive market potential but has not yet been adopted by the market (say new computer software). There is very little chance of losing your money when it is in the bank however most new businesses/technologies fail. You need to think about where you fit on this scale – think of it as a continuum from 1 (no risk) to 10 (high risk). Remember you don’t want to go to sleep at night worrying about your money so take this into account when deciding on your risk tolerance.

So you now have a starting platform you know your expectations, goals and attitude to risk – what next? You need to create a portfolio which is balanced both geographically and asset wise – here I would recommend seeing an advisor and get them to recommend a series of funds which, if you like you can then check them out yourself – one thing you will learn is there are many funds operating in the same sector and there is no harm in comparing to ensure you pick the right one. Professional advice will, at least, narrow down the options for you. It is the same reasoning here for picking funds over individual stocks, an advisor will have spent the time researching what funds are best for a given sector and how to build a portfolio where risk and return is managed for the investor.

Remember just because you live in a certain country does not mean you have to select funds that only invest in your country – look at other areas like China or India, Australia or Latin America – all have shown strong growth over the last two years and really every portfolio should have some exposure to these markets.

If you do the right leg work you can create a portfolio that should be a winner long term and as I always tell people – why not have your cake and eat it.

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