When I play basketball, I love to shoot an avalanche of three-pointers from “downtown.” (Albeit playing against my 14-year old son). When I play football, I can’t resist going long with a pass. And when I play golf, I always go for the green in two on par 5′s. In short, I like to swing for the fence. The same philosophy holds true when I’m investing, too. Hardly surprising, given that I specialize in Asia and emerging markets. But what kind of investor are you? It’s important that you’re aware of your personality and temperament when it comes to crafting your investment strategy. That’s because you can use it to profit and protect yourself much more effectively. Of course, it would be nice if there was a foolproof service that matched up investors’ portfolios with their personality traits. There isn’t – but I’ve got the next best thing. Here’s how you can better align the two – and ensure that your portfolio includes these four superpowers…
#1: Dial “D” for Diversification
Legendary value investor Sir John Templeton nailed it on the head with this sage advice: “Diversify. In stocks and bonds, as in much else, there’s safety in numbers.”
There’s no virtue in extremes. Rather, a more balanced, flexible approach that’s open to new strategies is the way to build an investment portfolio.
#2: Employ the “Core/Explore” Strategy
One way to prevent being too conservative or adding too many risky investments is to balance out your approach with a “core/explore” portfolio strategy.
The premise is simple: Just determine what proportion of your assets you primarily want to allocate towards more protective investments and put this into a conservative, well-diversified, “core” portfolio. It should have plenty of fixed-income investments and cash, plus a good balance of global equities and precious metals.
You can set aside the remaining capital for your “explore” portfolio. But keep in mind that seeking a little more reward brings additional volatility and risk. More aggressive asset classes include emerging markets and small/micro-cap stocks.
#3: Use Trailing-Stops
Nothing is more painful than picking a great stock and watching it peak… only to see it fall back to earth again. But it’s easy to avoid riding this rollercoaster.
A trailing-stop strategy automatically gets you out of a stock if it drops by a certain percentage. It mitigates a loss, protects your hard-earned gains and stops emotions from cluttering up decision to sell.
Of course, a stock will sometimes rebound just after your sell-stop is triggered. While that’s irritating, it’s not as painful as continuing to watch as your losses mount up or your profits evaporate by not having a stop in place.
#4: Become the Quality Control Manager Over Your Foreign Investments
If you’re only taking a U.S.-based approach to investing, you need to branch out and grab some foreign exposure, too. The good news is that there’s much more research and information available today than there was not so long ago.
Plus, it’s simple to do so. Due to high levels of disclosure and transparency, many investors opt for foreign stocks that trade on the U.S. exchanges. And in this regard, the explosion of U.S.-listed country ETFs listed over the past few years has made global investing significantly easier.
In my current portfolio, for example, I have ETFs from…
- Poland: The Market Vectors Poland ETF (NYSE:PLND)
- ~Turkey: The iShares MSCI Turkey Investable Market Index (NYSE:TUR)
- Austria: The iShares MSCI Austria Investable Market Index (NYSE:EWO)
- Hong Kong: The iShares MSCI Hong Kong Index (NYSE:EWH)
- Japan: The iShares MSCI Japan Small Cap Index (NYSE:SCJ)
Although I’ve visited the stock exchanges in Nepal, Vietnam and Mongolia, even I’m wary of placing any bets in these casinos. Transparency and disclosure there is hit-and-miss at best.
But if you employ these four ideas in your investing strategy, then there’s a good chance that you and your portfolio will match up much better.