— by George Leong, B. Comm.
I would like to talk a bit today about what I view as a portfolio approach to investing and trading. You don’t need a complicated strategy to get started. You need to keep the whole process simple. There’s only one way to approach investing in the stock market, and that’s with a professional-portfolio approach to your holdings.
Make no mistake about it: the stock market is a risky marketplace for all investors. Risk is the most important component of a stock. If you are always mindful of the degree of risk associated with a stock rather than the degree of its potential return, you’ll do a much better job of protecting your wealth over the long term.
It doesn’t matter if you are investing in the stock market, real estate, or antique cars. The best way to protect your wealth is not to put all your eggs into one basket. This is obvious.
One of the keys to successful investing is longevity. The longer you are in the business of investing in the stock market, the more experience you gain and the more opportunities cross your path.
When you are buying a stock, you are investing in a business. The people that run that business are entrepreneurs looking to generate a return on the capital their company invests. The people who provide this capital are investors like you. You invest your capital because you are looking to generate a decent return on your investment.
Naturally, if you are going to invest your money in a business, you want to have some say in how it’s run in order to protect your investment. In the stock market, however, you don’t have that luxury.
You can vote for company management or some specific initiatives, but you can’t actually participate in the company’s daily decision-making. So, this means that you do not have control over a company’s ability to allocate your capital. Therefore, the only option available to you as an individual investor in the stock market is to spread your investment capital around. You need to spread your own investment risk among a number of companies, because you can’t control the actions of any one of these entrepreneurs. The key is portfolio diversification.
The phrase used to describe this spreading of investment risk is “portfolio management.” Portfolio management is a process that encompasses the creation, monitoring and adjustment of your investments. The process never stops, because you are continually buying and selling new stocks. Taking a portfolio approach to your stock market investments helps you stay in the game longer and improve your returns.
Taking a portfolio approach to your stock market holdings means diversifying the industries in which you invest. Not only do you need to spread your investment capital around a number of different stocks, but you also need to spread your holdings across different industries. Owning a basket of stocks in one market sector increases your investment risk substantially, so you have to spread your money around different industries if you want to protect your wealth over the long term.
In addition, spread your assets from small-cap to large-cap stocks. Also invest in growth regions outside of North America where the risk-to-reward is extremely attractive. China is up 40% this year. Did you miss it?
The key is to spread out your risk across industries, countries, and company size to achieve the highest returns possible.