Small Business Investment Opportunities: Detailed Review
How to allocate capital? Diversify your assets
Diversification is simply not putting all your eggs in one basket. You might think that the biggest winners on the stock market bet everything on a few stocks whose price has been multiplied by 50 or 100, but that is not proven. Indeed, the modern theory of the portfolio, at the base of the asset management, developed in the 1950s by Harry Markowitz, shows that statistically the best gains are obtained by investing in all markets.
Apart from the mathematical demonstration of the superiority of this method, you can reason in an instinctive way to understand your intuition. If you invest equitably in five companies and one of them goes bankrupt, you will lose 20% of your capital overnight.
Small Business Investment Opportunities: Information
Worse, if these five companies are in the same industry, for example oil, the damage could spread to the entire industry and lead to a plunge in the value of your portfolio.
On the other hand, if you have diversified your investments, the underperformance of one sector will be offset by the outperformance of other sectors. The majority of portfolio managers fail to beat stock indexes that are diversified by making different choices. This should not prevent you from favoring one stock over another, but never focus more than 10% of your portfolio on a particular stock.
Take a long-term approach
In terms of investment, long-term thinking takes place over a period of several decades. Many financial products have a lifetime (we speak of maturity) greater than 10 or even 30 years, some so-called perpetual debt securities have not even maturity. The horizon of your product is very important and should correspond more or less to that of your financial project.
If you want to save for retirement in 20 years, it is counterproductive to put that money in unlockable booklets at any time that do not pay much.Give preference to long-term stocks and bonds, for example on life insurance, their return is much higher. Banks offer you formula-based funds (for example for a retirement between 2030 and 2035) where the share is important at the beginning and decreases as you get closer to your investment horizon .
Small Business Investment Opportunities: Tips and Advices for Investors
If you keep this goal in the long run, you will not have to worry too much about small daily fluctuations. You will inevitably have bad days during which some securities in your portfolio may lose 5% or more, but these variations are acceptable as long as you reach your long-term goal, ie to the realization of your project.
On the other hand, if you build a precautionary savings or for a horizon less than five years, reduce your risk taking. Indeed, the variations of the values of the financial products in the short term could lead to a situation where at the moment of unblocking your savings this one is lower than your saving of departure.
For real estate projects there are suitable products (PEL, CEL), you can also use the term-accounts, bonds or short-term deposit certificates and formula funds. In addition, the release of funds invested in the long term generally costs more than the most liquid investments.