Monday, December 17, 2018

Tipping the Scale

An investor’s primary goal, I believe, is to accumulate wealth through earning a return on their investment. Yet, what goes hand in hand with the desire to accumulate wealth, is the desire to reduce and control risk. The key to achieving both is balance. "The higher the risk, the greater the reward." So obvious, but yet so applicable to the stock market. You need to balance your investments to control your risk. Now for any investor this can be a daunting challenge and an on going on. For college investors however, I believe it is an even greater challenge. How do you balance an account with only a thousand dollars? Commonly accepted rules might tell you to place 20% in growth stocks, 20% in small caps, 10% international, ect, ect. Well 10% of $1000 is $100, you will be lucky to get 2 shares of any conservative large cap, and don’t even think about putting a percentage into bonds! It just isn’t possible. So just like there are thousands of ways to balance a high value account, there are many ways to balance your small investment account. I am going to simply outline my idea that I believe may be helpful as you ponder your investment strategy. You can always try to follow commonly help principles, but I think the amount of money, shares, and the transaction costs make this an unwise choice.

First of all, I would try to set a long term goal, and remember that we are talking about investing, and not trading! They are two different things. If you are investing
you can formulate a longer outlook for yourself. To set a goal, figure out what type of
a portfolio you would like to have in the future. Are you interested in value stocks, mature markets, or various funds? Pick a series of different securities that you would like to invest in over time, and build each on into its own portfolio of equal value to your account. For example, if you have a $1000 investment account, create four or
five different $1000 portfolios. Once you have done this you can sit back and prioritize your investments. You may have emerging markets as one of your portfolios, but are not too confident in its current outlook and risk level, so put that one aside for now. I would recommend for the first investment to pick the most conservative portfolio, whether it
be dividend stocks, mature markets, blue chips, mutual funds, index funds, ect. Once you have that selected, I would make that investment with your current account. In the meantime I would also setup a high yield savings account, which can currently earn you around 5% APR, or invest in a money market account.
Setup some form of savings system, whether it be monthly installments, or some periodic schedule to build up enough money for your next mini-portfolio. So once you save up another $1000, or some other amount that works for you, buy into your next mini-portfolio. While I know this appears to not necessarily balance your current portfolio, being a college investor you have the benefit of time, and you are really balancing your portfolio out over time. By starting with the most conservative investments, as your portfolio grows through capital gains and dividends, this first portion of your portfolio should in theory remain the largest position, thus lowering the overall risk.If you already have a portfolio that you would consider "unbalanced". I would not necessarily work to balance it because the transactional costs of doing this would be to high to substantiate the balancing. Instead, as you look ahead to building a larger investment portfolio, I would try to once again balance over the long term, and if your current positions are overly risky, begin to invest in safer securities.
As I stated before there are hundreds of ways to create a balanced portfolio, but I think this is a great way to begin planning ahead so that when you can graduate from college investor to an adult investor your portfolio will be ready and balanced!

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