Over 70% of the past century, the market has seen an increase in value, with investors averaging 10% gains each year. Wisely investing in the market gives people the opportunity to have their money work for them, generating income that helps them achieve their long-term financial goals.
Successful investors, however, know that quality investment management requires active involvement and proactive management of your investment portfolio. We will explore a variety of important skills that investors will want to learn, including portfolio rebalancing, performance tracking, and how to be adaptable to market shifts. Let’s look at these components more closely in our guide to better investment decisions.
Understanding Investment Management
Investment management is bringing together your investment goals, your assets, and your risk tolerance to determine how you should build a portfolio that will maximize your returns. This process requires examining the different investment products available to choose the best options. You then use this information to balance the portfolio across multiple types of assets.
As investors look at their options, they will learn that there are two types of investors: active investors and passive investors.
Active investors engage with the market and their stock shares more proactively. They analyze trends to determine the best time to pivot from one company to another or even from one type of asset to another. They buy and sell based on trends and projections about the future market.
Passive investors want to buy for a long-term investment. They do not buy and sell as often, choosing instead to wait out the changes in the market and anticipate long-term gains.
Regardless of whether one is an active or passive investor, remaining engaged in the process and the performance of one’s portfolio remains critical.
Building a Strong Foundation
To structure a portfolio, you will first need to set your financial goals. Typically, these goals are divided into two classes: long-term goals and short-term goals.
Short-term goals encompass those benchmarks you want to achieve within the next year. This often includes milestones like saving for a vacation or buying a new car.
Long-term goals are those further in the future, often more than 10 years away. The most significant goal that most people have in this category is retirement.
Based on your goals, you will want to analyze the different types of assets available. Asset allocation refers to how investors will split up their money across different types of investment products. Typically, this allocation looks at:
- Stocks, which typically offer the highest risk and the highest reward.
- Bonds, which come in several varieties but generally carry less risk and lower reward than stocks
- Cash options, which include the different types of savings accounts and investment accounts you can access at your bank, like certificates of deposit or money market accounts.
Splitting your assets across these different types of products helps you diversify your investments, which provides greater long-term stability. You will find it easier to withstand ups and downs because different types of assets perform better in varying conditions.
Portfolio Rebalancing: Why and How
As you watch your portfolio grow, you will also encounter the importance of rebalancing your assets. Rebalancing refers to the times when you readjust your investments so that you can ensure your asset allocation fits your desired portfolio balance. If you had wanted to have a 50/20/30 split across stocks, bonds, and cash options, but your stocks performed particularly well, you might find that the percentage of your total investment in the stock market increases to 60 or even 70% of your portfolio. Rebalancing your funds will involve reallocating some of those funds towards bonds and cash investments to keep your portfolio well-aligned with your stated goals.
Examining your portfolio regularly to manage this rebalancing process forces you to reexamine how you want to manage your finances and where your risks lie. Therefore, portfolio rebalancing is a good idea to pursue at least once per year as you also examine your investment strategy and financial goals. If you find that your portfolio regularly shifts significantly, you might need to do this examination more frequently. You will also likely want to rebalance your portfolio when you reach major life events, such as retirement or when you get married. These situations might shift your tolerance for risk and how you want to structure your portfolio to protect yourself.
Overall, it is a good idea to set a particular threshold that will trigger a rebalancing process. For example, if you find that your portfolio deviates more than 5% from your desired structure, you might decide to sit down and proactively rebalance your investments.
The rebalancing system helps you evaluate your performance, adjust to trends and changes in the market, and make sure that you achieve your desired financial goals.
Actively Managing Your Investment Portfolio
When you decide to put your money to work for you through investment, understanding the components of a well-balanced portfolio and how you can allocate your asset types based on your goals is critical. Investors should take an active interest in their portfolios so they can understand marketing trends and find opportunities to shift based on what the market is predicted to do next.
Investments can feel a bit overwhelming for those who are new to the process. However, considering these different options to create an asset allocation strategy that fits both your long-term and short-term goals is the first step towards taking the plunge into investing.
