October 2003 - Nr. 10
Financial Advice
Eduard Pohlmann
is a professional financial consultant with Investors Group, an industry
leader providing comprehensive financial planning and services. He is a
frequent speaker and commentator on financial planning and investments.
About (nest) eggs and baskets and maximizing long-term investment returns
October 2003
It's a common saying, 'Don't put all your eggs in one basket' - and, as experienced investors know, it's also an uncommonly important strategy when it comes to assembling and maintaining your investment portfolio.
Here's a simple example: If you commit all your investment 'nest eggs' to a single basket - a hot stock, for example - your 'egg-value' may grow, but you may also lose the total value of all your 'nest-eggs' if your investment fails. However, when you selectively place your investment 'nest-eggs' in a number of baskets, representing a mix of investments that react differently to market conditions, inflation and interest rate changes, you can reduce the impact of losing 'nest-egg' value in any single basket while maximizing your potential for overall 'nest-egg' growth in the long term.
In financial circles, the 'eggs and baskets' strategy is known as asset allocation - or how your investments are divided among the different asset classes (the three principal asset classes are stocks, bonds and cash) and within each asset class to obtain the best risk/return ratio for your situation and financial goals.
Here are some essential rules for achieving the most advantageous asset allocation strategy:
- Think and act long term . Markets do move up and down, sometimes rapidly, but the historic trend is up - so stick with your long-term investment plan, remain focused on your goals and be confident that if your plan is well designed, it will still be right for your goals. Remember that 'chasing the market' by constantly moving investment dollars around trying to 'catch' fast-rising stocks or hot mutual funds is a "mugs" game. Study after study (and the unfortunate experiences of too many everyday investors) have proven that staying true to a long-term investment strategy usually delivers far higher returns than jumping in and out of the market.
Any investment plan shouldn't be written and then forgotten. You should revisit it at least once a year to ensure that it continues to be right for you as your life, finances and objectives evolve. A professional financial planner can help you craft the optimum asset allocation strategy for you and keep it on track as time goes on.
This column, written and published by Investors Group Financial Services Inc., is presented as a general source of information only and is not intended as a solicitation to buy or sell investments, nor is it intended to provide professional advice including, without limitation, investment, financial, legal, accounting or tax advice. For more information on this topic or on any other investment or financial matters, please contact Eduard Pohlmann .
