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The guiding principles for making smart investment decisions

7th Apr 16 10:40 am

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Every smart investor knows that having long-term investment goals is the key to success. Long-term value investments allow investors to analyze situations comprehensively, before making their decisions either to buy or sell.

For Warren Buffett, investments should have long-term business characteristics that you feel very competent to judge. And that’s quite strategic considering that the stock market tends to better with the right decisions.

But apart from thinking long-term, other crucial factors should feature prominently in your investment plans. With the guiding principles enumerated below, you should be able to make smart decisions that’d increase your investment returns in manifolds.

Retouch your investment plans

Occasionally, you’d need to revisit your investment plans. You should check if your plans are robust enough to sustain your investment goals. Writing your plan can be likened to writing a resume. This is because resumes start with the objectives more often than not, and so does a well-crafted investment plan.

A typical investment plan should contain your investment policy statement. This should detail your return expectations and the amount of risk you’re willing to take. Once this is done, you should then begin to plot a roadmap for progress.

Assess your risk profile

Like said earlier, your investment plan must contain details of the amount of risk you’re willing to take. However, taking risks should be preceded by assessing your risk profile and measure your risk tolerance.

Although, it is often said that the less risk you take, you less you make. But don’t be cajoled by this statement, you should understand perfectly what you’re getting yourself into.

Apart from your capital risk, you should also consider shortfall, income, inflation, and currency risks and how they’re likely going to affect your investment.

Increase your investments

This is a no-brainer. As you close more deals, you begin to feel the impact of your investments in terms of positive ROI. But it gets to a point when your investment plateaus and you can’t seem to move up to the next level. The best thing to do in this situation is to make more investments or better still, start diversifying your investments.

Don’t put all your eggs in one basket. You could buy more stocks or secure more bonds. You could even digress into a new and promising industry. One of the advantages of diversifying your investment is that you have something to fall back on when the investment value of one of your asset category falls.

Rebalance your portfolio

Rebalancing helps you to stay within a realistic projection for your assets, not basing your investment decisions on past performances or pure emotions. The aim of rebalancing is to align your investments with your objectives and risk tolerance.

For investors with multiple portfolios (of assets), it’s pertinent to perform rebalancing at a regular interval. Although there is no fixed duration for this exercise, you might want to try it out once in a year. Although it is best to have a specific threshold at which you will rebalance.

Prepare for emergencies

Emergency situations are inevitable in life (not only in business). As an investor, you’re either putting your money into stocks, bonds, or cash to ward off the effects of uncertainties that may arise in the market. However, keeping an emergency fund should be your first investment plan.

So set aside a certain fund in your savings account or other low-risk accounts and ensure that you don’t use it for any other purpose. This requires a high level of discipline but is equally achievable.

Avoid high investment cost

If there’s one thing you want to avoid in your investment decisions, it definitely should be a high investment cost. These costs come in form of management fees which are charged annually. When they’re so high, they diminish accumulated income over time.

The easy way out is to target low upfront investments that have ongoing costs. You should also seek professional advice on the possibility of benefiting from low cost passive investment. Don’t get me wrong: all investments have their own costs but you have to find the ones that have low costs. And there are quite a lot.


As you can see, these are general guidelines on investment. Therefore, you have to relate the tips herein with your own situation. Only then would you be able to hit your investment goals.

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