Investment Strategies for Novices
Asset allocation is one of the first investment strategies that should be learnt. It is the way in which you divide your investment portfolio among three primary asset classes: stocks, bonds and money markets. This can boost your potential returns and ensure long-term investment success. It can also help you channel your investments. For example if your goal is to pursue growth and you are willing to take market risk, you would like to invest more in stocks. Asset allocation also helps you lower your investment risks, without diluting your investment goals.
As a first-time investor, you must also include the time frame and tolerance for risk in your strategy because your choice of investments depends upon these two factors. You must remember that every instrument has its own risk value.
Stocks are known to fluctuate frequently in value, carry a high level of market risk over the short term, earn high returns and normally outpace inflation. Bonds on the other hand have less severe short-term price fluctuations and therefore offer much lower market risk. Money market instruments are the most stable of all asset classes in terms of returns. They carry relatively low market risk but lack the potential to outpace inflation.
Diversification should be another part of your investment strategy. When you diversify your investments you reduce the risk level. It also helps you balance a fall in the value of one instrument with gain in the value of another.
Finally, you must plan for the long-term. The investors who benefit most are those who limit their short-term investments, and focus on long-term gains.
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