Many investors tend to focus on buying the right stock and buying and selling at the right time. But some experts say that these things are a sure way to hurt the performance of a portfolio.
Roger Ibbotson, chairman and founder of Ibbotson Associates and a professor in the practise of finance at the Yale School of Management, says that asset allocation, the process of putting money into different types of assets like large- and small-cap funds, international funds, bonds, and cash, is what really drives performance over the long term.
Ibbotson said, "In the long run, it doesn't matter if you picked the hot mutual fund or not. What matters is which asset classes you hold in your portfolio and how much of each you have."
To come up with a long-term investment plan, investors should think about their goals, how long they want to invest for, and how willing they are to take risks. This will help them figure out the right asset allocation, which they can then fill with mutual funds.
The time horizon of an investment is usually determined by the person's investment goals, such as saving for retirement, college, or a vacation home. If the investor has a short time frame for their investments, they should keep a conservative portfolio with returns that don't change too much. If the investor has a longer time horizon, they can be more risky in the beginning and then become more conservative as the goal gets closer.
Since everyone reacts differently emotionally to sudden changes in the value of their portfolio, investors need to know how much risk they are willing to take. This will show how well an investor can handle when the value of their investments goes down.
Ibbotson said, "Investors often let their feelings decide what to do with their money." "The value of your portfolio can go down a lot if you chase after high-flying funds that may have already peaked and sell when the market goes down."
Experts also say that investors should look at how their whole portfolio is doing instead of how each individual investment is doing. Investors lower their risk by putting their money into many different types of assets. They do this in the hopes that when one asset class is doing badly, others will do well. - NU
