Become a better investor
Lesson in Course: Portfolio management (beginner, 8min )
As a new investor starting out, what is a simple and effective strategy I can implement right away?
Building a simple portfolio is easy to do now with the different financial vehicles available. A passive portfolio doesn’t require as much attention and maintenance as an active portfolio and is generally a great place for beginners.
In times of strong economic expansion and the continual rise in the stock markets, a growth strategy takes an aggressive approach to capture the gains. Here are examples of a few easy-to-implement growth portfolios.
A pure stock portfolio provides very little protection against losses, but the tradeoff captures the most amount of gains when the markets are rising.
While all stocks can be very risky, we can build some basic protection into this portfolio through diversification. ETFs or Mutual Funds are great vehicles to choose from since they have diversification already built in.
It’s not good to take too much risk if we need the money in the short to medium term.
In addition to diversification, mixing some bonds into the portfolio can add a lot more downside protection.
In times of economic uncertainty, investors turn to bonds as a safe haven, and as stock prices drop, bond prices often go up. The inverse price movement of bonds helps offset losses from stocks.
More conservative strategies are prudent when the future is less certain.
These strategies are also great for people with shorter-term goals, such as saving for a downpayment on a house where they can’t afford to risk as much. While these strategies won’t earn as much as the aggressive strategies, they protect a lot more of the principal. If the market drops sharply, they also don’t require significant recovery periods to deal with losses.
Different strategies work well for different investors, and there is no right or wrong strategy. For those just starting, choosing a more conservative strategy allows us to get a good feeling of things before making changes.
Generally, the younger the investor, the more risk can be taken because there are more years to make up for potential losses.
In the case of Paper Chase, a conservative strategy could be very effective for Grandma's Challenge.