Investing can seem incredibly complicated and intimidating.
This is especially so now because there are thousands of stocks and ETFs to choose from, not to mention stock markets that always seem volatile and uncertain. Even tougher is deciding when and how to sell a stock or fund to lock in gains after a nice bull run or limit losses.
It helps to have a simple strategy and rules to help make these decisions pretty much automatically. Here are four principles that will help you get started.
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Four Principles to Keep Your Investing Simple
Build a Diversified “Core” Portfolio
Leonardo Da Vinci was right – “Simplicity is the ultimate sophistication.”
And the legendary global investor Sir John Templeton really nailed it on the head with this sage advice: “Diversify. In stocks and bonds, as in much else, there is safety in numbers.”
For your “core” portfolio, I would go with low-cost, tax-efficient exchange-traded funds (ETFs) as building blocks. As I describe in my book, Think Global, Grow Rich, this core portfolio has capital preservation as its primary goal and capital appreciation as a secondary goal. It is a well-diversified portfolio with allocations to fixed income, broad U.S. equity markets, exposure to high-quality international markets, income and dividend-oriented ETFs, gold, and even some exposure to other strong currencies in case the dollar falls off its perch.
Set Aside Ample Cash
Next, set aside a comfortable cash position of at least six months’ living expenses. This is where I part ways with many advisors who want their clients to always be fully invested. One reason to keep a lot of cash in your brokerage account is to take advantage of markets and stocks when they are on sale. You want to be able to move quickly and not have to figure out what stocks to sell.
Seek Capital Gains with Your “Explore” Portfolio
The capital that’s left can go to your “explore” portfolio with the full recognition that seeking capital appreciation means higher risk and volatility. You still need some diversification in this portfolio, but feel free to look to aggressive asset classes like emerging markets, commodities, sector ETFs, and individual stock ideas.
One great way to gain exposure to international markets is through country-specific ETFs.
With a click of the mouse, you can invest in 32 countries such as Singapore (EWS), Switzerland (EWL) or Mexico (EWW). Using country ETFs also gives you a hedge on the U.S. dollar weakening, since when you buy the Switzerland ETF, you are also getting exposure to the Swiss Franc. Pick countries that are out of favor, and with time, you will enjoy solid gains.
For individual stocks, try to only invest in companies you understand. Invest only in what you know. Don’t just accept a friend or colleague’s opinion, but do some independent homework on your own. Try to avoid complicated stories because managing these companies is difficult, and there are just too many things that can go wrong.
Capture Gains & Limit Losses
We have all been there. Nothing is more painful than picking a great stock and watching it peak and then fall back to earth. Don’t ride the rollercoaster with your investments.
First off, if you are fortunate enough to have a stock or fund double in value, immediately sell half your position to protect profits. Whenever you buy a stock, it’s smart to put in place a 20% trailing stop loss. This means you have an automatic exit if your stock falls 20% from its high. This is important because it takes emotion out of the equation and protects your hard-earned gains or limits your losses so you can fight another day.
Yes, it is not perfect, and sometimes that darn stock will rebound just after your stop loss strategy sells it. This is irritating but much less painful than watching all your gains evaporate day after day right before your eyes.
Follow these four simple rules and you’ll be way ahead of the crowd.
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