Thursday, January 21, 2010

Strategies for the successful investor part 7 : Performance obsession

Many investors are obsessed by performance in that they are always on the alerts for tips, hot stocks or emerging sectors of the economy. These investors always want to be on board of the latest bull market. They always want to buy at the lowest price and sell at the highest price.

However what investors need to know is that assets are mostly cyclical and that their ups and down do not takes place at the same time. Hence while one sector of the economy is down another sector will be down. Hence if you invest too heavily in one sector or in one asset then if their is a downturn or a bull market then you will be too exposed to that sector and as a result your portfolio will be adversely affected and you might lose heavily.

The way to go is to be exposed be a wide variety of assets such that when one asset lose value the decrease will be offset by an increase in the value of another asset. Hence if you are exposed to a wide variety of asset classes you will have your eggs in the same basket. In case their is a loss in one type of assets then it will only be a small part of your portfolio.

Hence the way to go is to through heavy indexing of the market. You will need to be exposed to a wide range of index fund and mutual fund. You will invest in bond fund, mutual fund in stocks, etc.

Hence when you will invest in index fund and mutual fund you will not have the need to chase performance. You will be exposed to every sectors of the economy and all this will be done passively. Hence  you will not need to chase performance. Your return will be close to that of the overall market.

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