For many investors, selecting the right investment strategy can be a difficult, challenging and time- consuming endeavor. As there are thousands of equities, mutual funds, ETFs and additional investments available for investors to choose from, how does one identify the right mix of equities and funds to invest in? Warren Buffet (one of the greatest minds in investing) once stated that an investor should know the companies they invest in. In other words, you must have an understanding of the functionality of the companies you are choosing to invest in. While there are many ways to identify potential investments, here are a few simple strategies you can utilize to select the most appropriate investments for your portfolio.
Understand Your Risk Tolerance
Risk tolerance is the extent to which you as an investor are comfortable with the risk of losing money on an investment. If you're unwilling to take the chance on an investment that might drop in price, your risk tolerance is lower. Conversely, if you are willing to accept the fact that your investment might lose value, then your risk tolerance is higher. This is especially important as you begin to select various securities to invest in.
You must have an understanding of where the investment lands on your risk tolerance radar. For example, some investors are completely comfortable with a market value decline of more than 10% in their portfolio in any given day, week or month. In fact, they may even buy more shares of a particular investment during a market correction. Is this you? How comfortable are you with losing money in your portfolio? Are you the type of investor who would sell your positions in the event of a market correction? These are questions you must ask yourself, because no market condition is guaranteed. Remember that investments are not FDIC-insured, may go down in value and they are currently not insured by any federal government agency.
Focus on Companies You Know
Look for companies that you are aware of and well-acquainted with. For example, if you buy your coffee from a certain coffee chain, finding more information on the company and taking a look at its organizational structure are a few good ideas to get started. While there are several ways of researching and analyzing a company, there are two in particular that are frequently utilized by investment managers: fundamental and technical analysis.
When analyzing a stock, futures contract, or currency using fundamental analysis, there are two basic approaches that can be used: bottom-up analysis and top-down analysis. When using the standard fundamental analysis to value a company, one typically looks at the company’s financial statements. These statements include the cash flow statement, balance sheet and income statement. They do this in hopes of finding a trend in terms of overall organizational performance that will predict the stock price of the company.
When performing a technical analysis, one uses real, public data in placing a value on the equity or investment they are reviewing. For stocks and equity investments, the fundamental method uses revenues, earnings, return on equity, and profit margins. For example, an investor can perform a fundamental analysis on a bond by reviewing the bond’s interest rates as well as the state of the issuing entity. Additionally, it is beneficial to look at the company’s leadership team and their overall performance in leading the company. Some questions to think about are as follows: Are they making the right decisions for their employees, consumers and shareholders? How are they managing the company and what is their vision as to the growth of the company?
Look Outside the United States, You Might Find Value
As you continue to explore potential equities to invest in, don’t be afraid to look abroad. There’s an acronym that is utilized in the marketplace known as BRICS, which stands for Britain, Russia, India, China and South Africa. The term BRICS is also used by companies that refer to the four-named countries as key to their emerging markets strategies. From an investment perspective, there could be up-capped and untapped opportunity in BRICS. This provides you with a way to diversify your equity holdings portfolio. Stretching the amount of risk you have in various countries is a good way to hedge against major losses in the marketplace. Keep in mind that while these investments can be viable for your portfolio, you must continue to follow the due diligence provided above. You want to ensure that you know the company, its management, purpose and technical analytical data as well.
It is important to ensure that you are thorough in choosing your investments and selecting the right investment strategy. Be careful to appropriately analyze the choices of investments before you. Do your due diligence and you will be able to find the right investments for your portfolio.