Daily Gains Letter

Read this if You Want to Be a Successful Investor

By for Daily Gains Letter | Jan 18, 2013

DL_George_9Stocks are currently near multi-year highs. Instead of thinking about the next big trade, now it’s time to make sure your portfolio is not overly vulnerable to a stock market correction if it were to surface. Of course, you should always take some profits off the table, which is key to stock market success.

In my view, a critical investment strategy is the concept of asset allocation, diversification, and the addition of small-cap stocks to maximize the expected return of your portfolio.

The concept of asset allocation should be a key part of any prudent strategy and will increase your stock market success.

Asset allocation refers to the asset mix of your portfolio, which is divided into the three major asset classes: cash, fixed income, and equities. Too much in equities and you are vulnerable to selling. Too much cash and you could miss out on a stock market rally.

As the macro and micro factors change, you should rebalance your asset mix and modify your investment strategy, thereby increasing your stock market success.

A great strategy for stock market success is the use of put options as a hedge against weakness.

The more risk assumed, the higher the expected rate of return, although this is not always the case in reality. For instance, getting into penny stocks and micro-cap stocks can add growth potential to your total portfolio return, but it also increases the risk.

A general rule for asset allocation is that the weighting of the fixed income portion as a percentage of your total portfolio should approximate your age.

Let’s say you are 25 years old. Under this scenario, a prudent investment strategy would see you have about 25% of your assets in fixed income and up to 75% in equities. And, on the other end of the spectrum, a 50-year-old entering the final phase of his or her working life should have a conservative 50% weighting in fixed income securities. Of course, a person at the retirement age of 65 should have a minimum of 65% in fixed income.

Keep in mind that this rule should only be used as a guideline and is not meant to be conclusive, but it will help to increase your stock market success.

Prudent asset allocation attempts to achieve the highest rate of return given the risk. The route to stock market success is to understand how to create an appropriate blend of equity, fixed income, and cash.

To determine your risk profile, you should first understand your investment personality.

Investors range from the ultra-conservative investor who wants to sleep at night to the highly aggressive speculator who thinks of the stock market as a roll of the dice.

It is critical for stock market success to stay within your risk boundaries if you are conservative. For example, if you tend to get jittery when the stock market gyrates, you should focus on blue chips and big-cap stocks.

Asset allocation is often dependent on your age, but in reality, understanding each person’s risk profile is also very important for stock market success. The only rule that generally applies is that the older you get, the less exposure to equities you should have, as you don’t want to risk your life savings for a hot tip from your barber, which would not be good for your stock market success.

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