By: Morgan International Staff Writers
When talking of investments, many will speak of being a prudent investor. The word Prudent traces back to Middle French and the Latin verb providēre which means to see ahead, foresee, and provide (for). The word is a natural choice when speaking of investments. We would like to share our 4 rules to be a prudent investor and therefore make strong returns whilst not being exposed to an undue amount of risk.
- Primarily invest in major index stocks and bonds
Major index stocks and the more frequently held bonds move more predictably. Remember that these often have long histories so that trends can be observed and analysed over many years. They also tend to be less shocked by market forces. We are not saying not to invest in small caps and foreign bonds too, but ensure the primary investment is in the big and established stocks and bonds.
- Diversify – but not too much
In your portfolio you should have a prudent level of diversification. Clearly you do not want to be spread too thin, but consider commodities, property, and perhaps even emerging market stocks. Clearly the less traditional the asset class, the higher the level of risk, and the reward too.
- Review often
Review the portfolio often and take action accordingly. This might include withdrawing from certain investments and ‘cashing in’, or perhaps deciding to take a loss. The prudent investors frequently review their portfolio (often multiple times a day using real time apps).
- Minimize fees
There will be many small fees across the portfolio for various types of transactions – buying stock, selling stock etc. These add up, particularly with a complex portfolio. These costs should be kept track off and streamlined where possible.
The prudent investor is mindful of the tips above, and also takes advice from a professionally qualified Chartered Financial Analyst (CFA) when they need some extra support and/or information.