Tips for Maximizing Investment Potential

​While investing inevitably involves some risk, some investment methods are less so than others. You may have no control over the market’s performance, but you can decide how much you can lose should things go wrong. Risk management, coupled with other principles, can maximize potential gains.

Before you invest, have an accurate picture of where you are and where you want to be financially. Your financial situation and goals determine the type of investments available to you. They also dictate how much risk you can take on.

Buy and hold is an investment strategy where you put your money in an asset and leave it there for a relatively long period. While it’s a common approach among stock investors, it works for other asset classes, like real estate and commodities like gold.

Buy and hold has several benefits. However, it ties up your capital, which can be limiting. It prevents you from taking advantage of short-term investment opportunities. What’s more, if fully invested it limits your ability to respond to financial emergencies.

Long-term investment calls for the ability and the willingness to endure the inevitable short-term declines for a chance at success over many years. Your investment will fluctuate. The stock you’ve invested in may drop significantly and stay low for months. Your ability to weather market turmoil may be the difference between success and failure.

The longer you let your money work for you, the higher your potential returns are likely to be, in part thanks to the power of compounding. Compounding applies not only to the invested capital, but also to the earnings. If you buy a stock that pays dividends and instead of withdrawing the dividends you use them to buy more shares, the investment will grow exponentially.

In addition to allowing you to leverage the power of compounding, staying invested also reduces transaction costs. The more frequently you get in and out of a market the higher the commissions and brokerage fees. Additionally, some states tax the sale of assets held long term more favorably than short-term investments.

Staying in a “losing” investment or watching it oscillate between profit and loss can be exasperating. Not pegging all your hopes on a single investment makes it less so. Putting your money in different investments spreads risk, ensuring no one investment can lead to a significant loss. This is called asset allocation.

Asset allocation refers to investing in a mix of asset classes (bonds, stocks, cash). It serves two purposes. Also called portfolio diversification, asset allocation is not just about where you put your money, but also how much of it you invest in a given vehicle. If you’ve decided to invest in stocks, consider investing in stocks in different industries to reduce the impact of potential losses on your portfolio.

When you enter the market can make or break your investment. Buying a stock at its peak can be expensive. With dollar cost averaging you can eliminate the pressure of trying to time the markets by scheduling regular stock purchases, without regard to the stock’s price.

A quarterly or annual portfolio review is also key. It helps you adjust exposure and allocation to reflect changes in market dynamics and your personal financial situation and goals. For example, if you’re approaching retirement, you may want to reduce exposure to volatile assets and shift to more stable ones.

Gary Begnaud

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