Getting lost among recommended investment avenues? A guide to proper investment management

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The classic board game Othello carries the line “a minute to learn…a lifetime to master”. This single sentence can apply to the task of choosing your investments. Understanding the basics doesn’t take long, but mastering the nuances can take a lifetime.

However, here are the basics. Once you know these concepts and principles, you will be ready to start investing wisely, either independently or through a professional investment manager.

Quick tips for the road:
Commit to a timeline. Give your money time to grow and strengthen.
Determine your risk tolerance and then choose the types of investments that match it.
Correctly evaluate your total capital and all the savings and investment avenues that make it up.
80/20 rule
The Pareto principle is a useful concept to keep in mind when starting a task that involves a huge amount of information, such as the topic “how to choose your investments”. In many aspects of life and learning, 80% of the results come from 20% of the effort. This principle, named after the economist Vilfredo Pareto, is often called the “80/20 rule”.

We will follow this rule and focus on the core ideas and measurements that represent most sound investment practices.

Know your timeline
You need to commit to a period of time during which you will leave these investments intact. A reasonable rate of return can only be expected with a long-term horizon.

When investments have a long time to work for you, they are more likely to weather the inevitable ups and downs of the stock market.

It may be possible to generate a return in the short term, but it is less likely and more dangerous. As the legendary investor Warren Buffett said, “You can’t have a baby in one month by impregnating nine women.”

The magic of compound interest
Another important reason to keep your investments intact for several years is to take advantage of compound interest.

When people cite the “snowball effect”, they are talking about the power of compound interest. When you start earning money on top of the money your investments have already earned, you experience compound growth and the magic of compound interest.

This is why people who start the investing game earlier in life can be much more successful than those who start later. They get the benefit of compounding growth over a longer period of time.

Choose the right asset classes
Asset allocation means dividing your investment into several types of investments, each of which represents a percentage of the total.

For example, you can put half of your money in stocks and the other half in bonds. If you want a more diversified portfolio, you can expand beyond these two groups to include real estate investment trusts (REITs), commodities, forex or international stocks.

To know the right allocation strategy for you, you need to understand your tolerance for risk. If temporary losses keep you up at night, focus on lower risk options like bonds. If you can handle setbacks in pursuit of aggressive long-term growth, go for stocks.

It’s also not an all-or-nothing decision. Even the most cautious investor should mix in some blue-chip stocks or a stock index fund, knowing that these safe bonds will offset any losses. And even the most intrepid investor needs to add some bonds to soften a sharp decline.

The rewards of diversity
Choosing between different asset classes not only manages risks. Greater reward comes from diversity.

Nobel Prize winning economist Harry Markowitz referred to this reward as “the only free lunch in finance”. You will earn more if you diversify your investment portfolio.

Here’s an example of what Markowitz meant: A $100 investment in the S&P 500 in 1970 would have grown to $7,771 by the end of 2013. Investing the same amount over the same period in commodities (such as the benchmark S&P GSCI) would have made money Yours to grow to 4,829 dollars.

Now, imagine that you adopt both strategies. If you had invested $50 in the S&P 500 and the other $50 in the S&P GSCI, your total investment would have grown to $9,457 over that period. This means that your return would have outperformed the S&P 500 portfolio alone by 20% and was almost double the performance of the S&P GSCI.

Certainly, a mixed approach works better.

Traditional and alternative assets
Most financial professionals broadly divide all recommended investment avenues into two categories, traditional assets and alternative assets.

Traditional assets include stocks, bonds and cash. Cash is money in the bank, including savings accounts and certificates of deposit.

Alternative assets are everything else, including commodities, real estate, foreign exchange, art, collectibles, derivatives, venture capital, specialty insurance products and private equity.

Most individual investors will find that a mix of stocks and bonds, plus a cash cushion, is ideal. Everything else requires very special knowledge. If you are an expert on ancient Chinese porcelain, go for it. If you are not, you are better off staying with the basics.

Investment and finance management requires strategy, proper planning, professional knowledge and a lot of patience, but the best way to achieve optimal management for your investments is through personal investment portfolio management by investment and finance experts.

At the wise company you will find experts with extensive experience and a deep understanding in the fields of investments and finance so that you can be sure that your money is in good hands.

In the next part of the guide, we will deal with creating a proper diversification of an investment portfolio and how you can locate all your savings and investment avenues in a simple and efficient way, so that you can properly assess your total capital and the options available to you.