Unbelievable isn't it. How I claim to be able to do this.
Well, I really don't like to talk about investing. Cos everyone is different. Everyone's goals are different.
Everyone's view point is different. Without taking these into account. There is NO best way to invest.
I am a passive dividend investor. I don't particularly like volatility. But I don't mind my portfolio to be down 10%. Everyone will define volatility differently. Will define risk differently. I am risk adverse. But I'm 100% invested in equities. To me risky is not 10% volatility. To me, risky is permanently losing 50% of my portfolio. Volatile is +5% today -10% tomorrow, +6%... and so on. and I have constructed my portfolio based on these parameters.
There could be another passive investor who says the same thing. He doesn't like volatility, risk adverse. But to him, he cannot stand losing 5% of his portfolio. He cannot sleep at night. He feels equities are risky. etc...
Others may believe in passive long term capital gains and are willing to ride out large swings in market value.
Or another may be passive long term but want a lower beta.
Some may think long term is 1 year. Or maybe 10 years.
Some think 3% movement is risky. I think 10-15% is not risky.
So how can ANYONE tell ANYONE what is the best way to invest? Usually, you should listen/believe anyone who talks to you telling how you should invest. Unless he/she first talks about your goals. Your idea of risk. What you define as long term, what you define as short term, what you define as volatility, what you want for your return in exchange for the risk, what types of dividends you want, do you want interest income, dividend income, business dividend or REIT dividend, etc. There are so so many considerations.
So what would I say about the best way to invest? Simply, know your goals. Define your terms. Know what it means when you say volatile, Define for yourself what does risky mean. What do you want to gain? Dividends? What kind of dividends? Long term? How long are you willing or are able to old on until?
Only then can you effectively build your portfolio. No financial adviser is going to help you do this. There is this thing about "Goals based selling/investing" which financial planners are supposed to do. However, this is very broad based. If every financial adviser were to ask you these questions which I have asked you, they won't be able to sell anything. Usually because, most of us do not know what our own definition is. Some of my friends tell me they feel equities are risky. I ask them what do they mean, they cannot explain it. Not to mention, they are also part of the financial industry so they should know about risk. Despite this, most of us do not understand risk or our own tolerance to it. Some tell me, when the stock market crashes, I'll lose everything. This is also not true. Essentially, stocks can recover as long as they are the right stocks.
Some points which I have constantly reminded myself.
1) What is my goal?
To supplement my income with passive dividends
2) what is my business?
I look at high dividend stocks, REITs, cash cow businesses, not growth stocks although I know they might be able to make more money faster, it is not my role or business to be dabbling in them as they will not give me the passive income which I am looking for.
3) What is my horizon?
I am willing to hold stable stocks for 10 years or when I predict a market crash. (There are indicators which I feel will lead to a market crash so I aim to sell down before that. I also keep telling myself to ONLY look out for those indicators instead of jumping and panicking at every market dip.)
4) When do I buy in or sell down?
I buy in consistently every few months when there are available funds. I do not try to time the market on a regular basis. Some people call this dollar cost averaging. I sell down when the business is not able to provide the right amount of dividend returns or the financial statements do not show a good rolling 3 year period.
5) What is my risk/asset allocation?
100% equities or maybe properties when I can buy a 2nd property. Personally, I feel there is no point in investing in fixed income. I recognize there might be some benefits to a balanced portfolio 80/20 equities/bonds, but I choose not to do so as I believe that my dividends provide the income of bonds with the potential for capital growth. Also, I am somewhat a macro cycle investor and will try to predict the largest market crash to capitalize on it.
I feel that keeping these questions in mind keep me on track on my investment principles and how to better structure my portfolio. Rather than just looking at the next hot stock or trying to determine the valuation to buy or sell. The aim is for me to keep the first point in mind. What is my goal. That should the the first thing that you think of when you structure your portfolio. The others are just ways to get there. Also it might be good to pen down your thoughts as you might get distracted along the way or change your thought process but forgetting the goal. What's important is to determine the goal, then the steps. If you want to revisit/reanalyze your steps, you should also look at the goal again to ensure that the steps which you have reconsidered will help to achieve your goal.
Also, I note that my thoughts when I am calm are clearer than when I panic. So following the process or notes is very important when the market is performing poorly as it is very easy to get distracted or afraid when the market turns downwards.
Does this thinking gel with yours? How do you plan or structure your portfolio? Do you adjust your views every few months even though you say you are a long term passive investor? Share your thoughts below!