Investing can be very complicated and confusing, but it also can be very simple. Today I am going to try to simplify investing with these 3 rules.
1. Own Equities
Equities is just another word for stocks. Why is this the first and most important rule? Stocks have historically out performed fixed income (Bonds/Money Market/Savings Accounts) over the long term, and that is including the few crashes we have had. In fact, that battle is not even close, especially now that fixed income has stayed so low the past few years. Check out this chart which compares the annual return from 1926-2013 of the S&P 500 (Stocks) with Treasury Bills (Fixed Income).
You can see Stocks have outperformed Fixed income by over 6% per year over the long term. It is obvious to see the long term advantage of owning stocks in your retirement portfolio.
Diversification, if done correctly, can increase return and decrease volatility (Risk). Diversification in your investment portfolio is measured in part by the number of stocks you are invested in, as well as the different categories and countries those stocks are located in. For example, if you invest in the S&P 500 Index, you are investing in 500 very large US companies. You are not really diversified if you only invest in the S&P 500.
There are many different categories of stocks to invest in. There is Micro cap (very small companies), Small Cap, Value, Growth, International. Matson Money specifically invests our clients in over 12,000 stocks in all of those categories throughout the world.
The benefit of diversification is to lessen the risk that any one stock or group of stocks will crash, go bankrupt etc. The standard deviation (volatility) of your portfolio can also be managed through proper diversification.
Rebalancing at a simple level is just buying low and selling high. If your portfolio is 50% in Stocks and 50% in fixed, rebalancing would keep it that way through many different market swings. If stocks go up faster than fixed, then you need to sell stocks (high) and buy fixed (low), and the other way around if the opposite happens.
Rebalancing most importantly keeps your portfolio at the risk preference that you choose, and especially helps to reduce risk in down markets. It can also give your return a slight boost over the long term as well.
Now that you know the 3 rules of investing, you need an investment coach that understands and implements these rules as well. If you can keep these 3 rules then your retirement portfolio will be in good shape over the long run.
By Jimmy Hancock
Matson Money. The Market Factor. Digital image. Matsonmoney.com. N.p., 23 July 2014. Web. 4 Nov. 2014. <https://www.matsonmoney.com/>.