Preparing Your Portfolio
Each year brings with it new challenges. The global economic situation also throws new challenges at your investments, but as long as you take precautions prior to any calamitous events, then, most likely, your personal financial situation should remain balanced and relatively stable.
The trick is to prepare yourself and your investments for any future drastic market movements. Of course, it is impossible to exactly predict when or if the market will hit new highs or experience a sudden downturn. But if you create a plan in advance, you might be able to avoid making basic mistakes, no matter which way the markets move.
The first is a plan I constantly preach, to set your goals, both short- and long-term objectives. Be specific, write them down and post them someplace that will allow you to see them, read them and study them daily. Follow the plan and try not to make emotional decisions.
Be prepared for anything. The chances of the markets going through a correction are very good in 2006. But you must also remember that the possibilities that the markets will grow in value are also very good. Markets go up and down, and you need to prepare for that. Some investors incorrectly believe they don't need to do anything when the markets are strong and their portfolio is gaining in value.
Don't forget to watch the asset allocation. Know what you are invested in and make sure that a few times each year you examine where you money is invested and determine whether or not it's working for you. You can set a plan to rebalance every month or once a quarter, whatever makes you comfortable. Just don't ignore your investments.
Make sure you diversify. I know you are sick and tired of me lecturing about that basic principle of investing, but I continue to hear stories from investors all over the country who keep on getting burned because they don't practice proper diversification. If just one segment of the market is providing all your gains, you could end up with an unbalanced portfolio.
Once you find your investment style, institutionalize it to your personal trading method. When you find something that works for you, don't let go of it. Try writing a journal to document your winning trades and, maybe even more important, your losing trades. Just like writing down your goals and ambitions, physically writing down the particulars about your winning and losing trades will burn the experiences into your mind permanently so you'll know what to do, or what not to do, the next time.
The information available to us in the U.S. is almost infinite. Unlike other parts of the world, we have the Internet, libraries, book stores, magazines, workshops, college courses, television programs and radio shows that can teach us about advanced strategies of investing. Find the tactics that work best for you. Make sure you feel comfortable with the manner in which you are involved in the investment community. If you need help, find an investment professional who can be a mentor and a guide. The more you learn, the better off you will become.
Happy Investing in 2006!
Originally published in James Dicks: Buy*Sell*Hold magazine.