Keys to Becoming a Prudent Investor

As the equity markets rebound and more stable returns reappear, it is a good time to review and consider what it means to be a prudent investor.  If the past several years have taught us anything it’s that in times of unpredictable financial markets, rational and savvy investment decisions often get lost in the fear and panic of the moment.   Following these few key points could help you avoid making bad investment decisions in the future:

  • Understand Your Investments:  It’s safe to say that if you are putting your money into something you don’t understand, you are at risk.  This doesn’t mean you have to be an expert in what you are investing in, but you should at least be aware enough to fully recognize the opportunity and the risk. Be skeptical when appropriate but do so rationally and seek out information from those who may be more in the know than you.
  • Know Your Risk Tolerance: Prior to making any investment, one should know how much risk they can tolerate.  If making a specific investment makes you significantly uncomfortable, then you may want to rethink it.  Also reconsider if any loss you might sustain would seriously jeopardize your financial health.
  • Monitor Your Investment Results:  If some of your investments are underperforming relative to the rest of your portfolio, learn the reason why and make the necessary adjustments. If your objective is a balanced portfolio ensure that your investments are, in fact, balanced. While trying to achieve higher gains typically means more risk, a good financial planner can help you manage those risks. Knowing a little about the history of market trends would also be helpful in making decisions about the timing of future investments.
  • Diversify:  As the expression goes, “don’t put all your eggs in one basket”.  Translated this means don’t put all your savings into one investment or one investment class.  As part of an overall investment strategy make sure that you are appropriately diversified between equities, fixed income or bonds, and possibly other classes such as real estate.  In doing so, when one class is not performing well, chances are any losses will be minimized by performance in the other classes.
  • Take Emotion out of the Equation:  Many investors sustain losses due to fear, panic and unbridled enthusiasm.  Don’t panic and follow the crowd by selling out of fear when the market takes a drop.  Similarly, don’t be persuaded to buy just because everyone else is.  You cannot time the market – most people buy and sell at the wrong time. Make sure your decisions are rational and logical based on solid reasoning, not emotion.
  • Develop a Plan and be Patient:  If the plan is based on solid reasoning and planning then, in the long run, it should prove effective.  In the future it might require minor tweaking, but give it an opportunity to perform.  Don’t overlook identifying time periods that you may require access to a portion or all of your funds. 
  • Practice Risk Management:  Develop a strategy of risk management to ensure that your funds stay invested should a health crisis or other insurable event occur. Maintain sufficient insurance coverage to protect against this very real possibility. 
  • Seek Professional Advice:   Availing yourself of the services of a certified planner who is fully aware of your particular circumstances, objectives and risk tolerance will aid immensely in ensuring that you are prudent in your investment choices. The value of having someone to talk to when the markets are fearful or to draw your attention to market opportunities? –  Priceless!

By becoming a prudent and informed investor you can build wealth safe in the knowledge that your investment decisions were made in the most appropriate and informed way.
Remember, you don’t have to feel that you are alone in this process.  The investment landscape is full of exciting opportunities and should you require guidance we can explore them together
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