Diversification, the backbone of modern portfolio theory, is now almost a rule of thumb in the investing world. This concept, however, wasn’t always as widely practiced as it is now. In fact, Harry Markowitz and the rest of the team that developed the concept during the 1950’s went on to win a Nobel prize for the idea in 1990.
The concept is simple: if you spread your investments out over a wide range of stocks, bonds, and other types of investments, you will still see a good return on your investment with a lower chance of losing a large portion of your investment in the long term. The less tolerant to risk you are, the better it is to diversify to protect your assets from short fluctuations in the market.
Below are some of our best tips to maximizing your returns while lowering risk.
When it comes to investing and most matters involving money, it seems the majority of people are influenced by fear. You might sell a stock out of fear that you are going to lose a bunch of money, or you might see a downturn in the stock market and decide not to invest at all. You should never invest money if you are afraid to lose it. I have experienced situations where I did not buy a stock and then it dropped significantly to which I was happy with my decision.
After you’ve established how much risk you can tolerate, you will need to find a vehicle to invest it through. Transaction costs and management fees are the kryptonite of investments. They dramatically eat into profits, especially with smaller dollar value investments. Finding a broker with low transaction fees is essential.