How to Work out a Rental Yield

How to Work out a Rental Yield.

Rental yield, essentially, tells you how much you can expect to earn from an investment property that you're renting out. It's typically expressed as a percentage of the cost of the property. You can use this figure to determine if a property you're thinking about buying would be a good investment or to understand your return on investment (ROI) in a property you already own. This figure is also helpful if you're trying to decide if a "buy-to-let" mortgage is affordable for you. To work out the rental yield, you need to know the total costs of buying and owning the property as well as the amount of rent you'll collect.

Method 1 Totaling Property Costs.
1. Calculate your yearly mortgage payments. If you have a mortgage on the property, total the mortgage payments you would make over the course of a year, including interest, taxes, and any associated fees. These payments are part of your cost of owning the property.
Even if you don't have a mortgage, you're likely still responsible for property taxes on the property. Those would also be considered part of your costs of ownership.
If you don't own the property yet, use an estimate of mortgage payments or get an offer from a mortgage company for the property and use that number instead.
2. Get a quote for insurance. If you rent out the property, you'll typically need landlord insurance, which may have different rates than homeowner's insurance. If you don't already own the property, a quote from a reputable insurer will help you estimate this cost.
In addition to landlord's insurance, you may also want to consider other types of insurance to cover damage to the property.
Rent insurance may also be available to you, which provides you some money in the event your tenant breaks their lease or needs to be evicted for nonpayment of rent.
3. Include any management fees or other property expenses. If you've hired a management company to run the property on your behalf, their fees are considered part of your costs. You may also have other property expenses or fees, depending on where the property is located.
For example, if you only own the building but not the land, you may have to pay rent for the land that the property sits on.
If you have a unit in an apartment building or condominium complex, you may also have association fees to consider.
Tip: Include in this category expenses you might incur in the event you have to advertise for a tenant. Fees for listing the property or doing background checks on tenants are also costs of owning and renting the property.
4. Estimate costs for repairs and maintenance. Over the course of the year, your tenant may have things break that need to be repaired. While you can't necessarily predict all of these expenses, you can typically come up with a reasonable estimate based on the age of the property and its fixtures.
You also want to consider major repairs that may be necessary in the event of a natural disaster or other event. While your insurance may cover some of this expense, you'll likely still have to pay a deductible.

Method 2 Determining Gross Rental Yield.
1. Total your yearly rental income. Evaluate how much you charge in rent, then multiply that amount to get the total rent you'll collect each year. If you collect weekly rent, multiply the weekly rent amount by 52. For monthly rent, multiply by 12.
For example, if you rent the property out for $500 a week, you would have an annual rental income of $26,000.
2. Find the current value of the property. If you plan to purchase the property this year, the value of the property would be equal to your purchase price. However, if you already own the property, use the most recent appraisal to determine the current value.
If you're looking at a property for sale, use the asking price as the value of the property, even if you think the asking price is too high and plan to make a lower bid on it.
3. Divide the rental income by the value to find the gross rental yield. Once you have those two figures, complete the equation. Your result will be a decimal value. Multiply that number by 100 to get a percentage.
For example, if your yearly rental income is $26,000 and the property is valued at $360,000, you have a gross rental yield of 7.2%. Gross rental yield is considered ideal if it's somewhere between 7 and 9%, so the gross rental yield for that property is good. Any lower than that, and you likely wouldn't have the cash flow in the event emergency repairs were needed.
Warning: While gross rental yield is easy to calculate, it doesn't take a lot of other factors into account that can affect the investment value of a property, such as the property's location, age, or condition.

Method 3 Calculating Net Rental Yield.
1. Start with your total yearly rental income. Just as when working out gross rental yield, you'll need the total rent you collect from the property in a year. Multiply weekly rent by 52 and monthly rent by 12 to find the annual amount.
For example, if you rented a condominium for $2,000 a month, your annual rental income would be $24,000.
Tip: Net rental yield is typically calculated at the end of the year, looking back at real numbers. If the property was vacant for any period during the year, don't include the rent you would have received for that time in your yearly rental income total.
2. Subtract your annual expenses from the rental income. For net rental yield, you'll also take into account the other costs of owning the property. Include all fees, mortgage payments, interest, taxes, insurance premiums, and other costs associated with the property for the year. Typically these will be monthly expenses, so don't forget to multiply them by 12 to get the annual total.
For example, suppose your annual rental income was $24,000 and the condominium unit cost you $900 a month to maintain. Your annual cost to own the property would be $10,800. When you subtract $10,800 from $24,000, you get $13,200.
3. Divide the result by the current value of the property. The current value of the property is not your mortgage payment, which likely includes interest, taxes, and other fees. Instead, look at the value of the most recent appraisal of the property. That's the amount you could likely sell the property for.
For example, suppose the condominium you own is worth $250,000. You have an annual rental income of $24,000 for the property, which decreased to $13,200 by the costs of owning the property. When you divide $13,200 by $250,000, you get 0.0528.
4. Multiply by 100 to find your net rental yield. Net rental yield, like gross rental yield, is expressed as a percentage of the value of the property. To get that percentage, take the decimal you got when you divided the annual rental income less costs by the current value of the property and multiply it by 100.
To continue the example, if you had annual rental income less costs of $13,200 divided by $250,000, you would have a net rental yield of 5.28%. This is considered a relatively low rental yield, but might still be sustainable depending on the location of the property or your reasons for owning it.

Community Q&A.

Question : When you say an acceptable yield is 7-9%, are you referring to the gross yield or the net yield?
Answer : A yield of 7 to 9% is considered a good yield regardless of whether it is a gross yield or a net yield. The net yield simply gives you more information about the actual cost of owning and managing the property. A property with a gross yield of 7 to 9% may have a much lower net yield, for example, if the property needed extensive renovations or repairs. In that case, it likely wouldn't be a worthwhile investment. However, a lower net yield might be acceptable depending on your reasons for owning the property and its location. For example, you might be willing to take a lower yield in a high-growth area where the property was rapidly appreciating in value.
Question : Does net yield include interest-only costs to the bank?
Answer : Net yield includes all costs of owning the property. If you have a mortgage on the property and are paying interest on that mortgage, those costs would be subtracted from your annual rental income along with all the other costs.
Question : What is the acceptable yield?
Answer : It depends on your goals. I'd say an acceptable average would be a 7-9% yield, but you may be happy taking as low as 4% if it's just supporting a pension, or if the property is located in an up-and-coming area where the value will increase significantly over time.
Question : Is there a good online calculator that will do this for me?
Answer : Excel or Google Docs can do this for you. Both are very good at it and keep track of it too. They both allow you to manipulate data to extract even more information.

Tips.

Work out your rental yield at least once a year. It will change depending on operating expenses and changes in the value of your property. Keeping tabs on your rental yield will help you determine when it's best to sell the property.
There are many real estate and finance companies that offer free rental yield calculators online. Simply search for "rental yield calculator" followed by the name of your country. The country name is necessary to ensure the calculator uses the same currency as you.

Warnings.

If you're comparing investment properties to buy, look at the property's past appreciation and potential to appreciate in the future as well as its rental yield. A high rental yield doesn't necessarily equate to a good investment if the property is in an undesirable area.

June 04, 2020

How did Warren Buffett get started in business?

How did Warren Buffett get started in business?

By BRENT RADCLIFFE.
Warren Buffett may have been born with business in his blood. He purchased his first stock when he was 11 years old and worked in his family’s grocery store in Omaha.
His father, Howard Buffett, owned a small brokerage, and Warren would spend his days watching what investors were doing and listening to what they said. As a teenager, he took odd jobs, from washing cars to delivering newspapers, using his savings to purchase several pinball machines that he placed in local businesses.

His entrepreneurial successes as a youth did not immediately translate into a desire to attend college. His father pressed him to continue his education, with Buffett reluctantly agreeing to attend the University of Pennsylvania. He then transferred to the University of Nebraska, where he graduated with a degree in business in three years.

After being rejected by the Harvard Business School, he enrolled in graduate studies at Columbia Business School. While there, he studied under Benjamin Graham – who became a lifelong friend – and David Dodd, both well-known securities analysts. It was through Graham's class in securities analysis that Buffett learned the fundamentals of value investing. He once stated in an interview that Graham's book, The Intelligent Investor, had changed his life and set him on the path of professional analysis to the investment markets. Along with Security Analysis, co-written by Graham and Dodd it provided him the proper intellectual framework and a road map for investing.

Benjamin Graham and The Intelligent Investor.
Graham is often called the "Dean of Wall Street" and the father of value investing, as one of the most important early proponents of financial security analysis. He championed the idea that the investor should look at the market as though it were an actual entity and potential business partner – Graham called this entity "Mr. Market" – that sometimes asks for too much or too little money to be bought out.

It would be difficult to summarize all of Graham's theories in full. At its core, value investing is about identifying stocks that have been undervalued by the majority of stock market participants. He believed that stock prices were frequently wrong due to irrational and excessive price fluctuations (both upside and downside). Intelligent investors, said Graham, need to be firm in their principles and not follow the crowd.
Graham wrote The Intelligent Investor in 1949 as a guide for the common investor. The book championed the idea of buying low-risk securities in a highly diversified, mathematical way. Graham favored fundamental analysis, capitalizing on the difference between a stock's purchase price and its intrinsic value.

Entering the Investment Field.
Before working for Benjamin Graham, Warren had been an investment salesman – a job that he liked doing, except when the stocks he suggested dropped in value and lost money for his clients. To minimize the potential of having irate clients, Warren started a partnership with his close friends and family. The partnership had unique restrictions attached to it. Warren himself would invest only $100 and, through re-invested management fees, would grow his stake in the partnership. Warren would take half of the partnership’s gains over 4% and would repay the partnership a quarter of any loss incurred. Furthermore, money could only be added or withdrawn from the partnership on December 31st, and partners would have no input about the investments in the partnership.

By 1959, Warren had opened a total of seven partnerships and had a 9.5% stake in more than a million dollars of partnership assets. Three years later by the time he was 30, Warren was a millionaire and merged all of his partnerships into a single entity.
It was at this point that Buffett’s sights turned to directly investing in businesses. He made a $1 million investment in a windmill manufacturing company, and the next year in a bottling company. Buffett used the value-investing techniques he learned in school, as well as his knack for understanding the general business environment, to find bargains on the stock market.

Buying Berkshire Hathaway.
In 1962, Warren saw an opportunity to invest in a New England textile company called Berkshire Hathaway and bought some of its stock. Warren began to aggressively buy shares after a dispute with its management convinced him that the company needed a change in leadership..  Ironically, the purchase of Berkshire Hathaway is one of Warren’s major regrets.
Understanding the beauty of owning insurance companies – clients pay premiums today to possibly receive payments decades later – Warren used Berkshire Hathaway as a holding company to buy National Indemnity Company (the first of many insurance companies he would buy) and used its substantial cash flow to finance further acquisitions.

As a value investor, Warren is a sort of jack-of-all-trades when it comes to industry knowledge. Berkshire Hathaway is a great example. Buffett saw a company that was cheap and bought it, regardless of the fact that he wasn’t an expert in textile manufacturing. Gradually, Buffett shifted Berkshire’s focus away from its traditional endeavors, instead using it as a holding company to invest in other businesses. Over the decades, Warren has bought, held and sold companies in a variety of different industries.

Some of Berkshire Hathaway’s most well-known subsidiaries include, but are not limited to, GEICO (yes, that little Gecko belongs to Warren Buffett), Dairy Queen, NetJets, Benjamin Moore & Co., and Fruit of the Loom.  Again, these are only a handful of companies of which Berkshire Hathaway has a majority share.
The company also has interests in many other companies, including American Express Co. (AXP), Costco Wholesale Corp. (COST), DirectTV (DTV), General Electric Co. (GE), General Motors Co. (GM), Coca-Cola Co. (KO), International Business Machines Corp. (IBM), Wal-Mart Stores Inc. (WMT), Proctor & Gamble Co. (PG) and Wells Fargo & Co. (WFC).

Berkshire Woes and Rewards.
Business for Buffett hasn’t always been rosy, though. In 1975, Buffett and his business partner, Charlie Munger, were investigated by the Securities and Exchange Commission (SEC) for fraud. The two maintained that they had done nothing wrong and that the purchase of Wesco Financial Corporation only looked suspicious because of their complex system of businesses.
Further trouble came with a large investment in Salomon Inc. In 1991, news broke of a trader breaking Treasury bidding rules on multiple occasions, and only through intense negotiations with the Treasury did Buffett manage to stave off a ban on buying Treasury notes and subsequent bankruptcy for the firm.
In more recent years, Buffett has acted as a financier and facilitator of major transactions. During the Great Recession, Warren invested and lent money to companies that were facing financial disaster. Roughly 10 years later, the effects of these transactions are surfacing and they’re enormous.

A loan to Mars Inc. resulted in a $680 million profit.
Wells Fargo & Co. (WFC), of which Berkshire Hathaway bought almost 120 million shares during the Great Recession, is up more than 7 times from its 2009.
American Express Co. (AXP) is up about five times since Warren’s investment in 200813
Bank of America Corp. (BAC) pays $300 million a year and Berkshire Hathaway has the option to buy additional shares at around $7 each – less than half of what it trades at today.
Goldman Sachs Group Inc. (GS) paid out $500 million in dividends a year and a $500 million redemption bonus when they repurchased the shares.

Most recently, Warren has partnered up with 3G Capital to merge J.H. Heinz Company and Kraft Foods to create the Kraft Heinz Food Company (KHC). The new company is the third largest food and beverage company in North America and fifth largest in the world, and boasts annual revenues of $28 billion. In 2017, he bought up a significant stake in Pilot Travel Centers, the owners of the Pilot Flying J chain of truck stops. He will become a majority owner over a six-year period.
Modesty and quiet living meant that it took Forbes some time to notice Warren and add him to the list of richest Americans, but when they finally did in 1985, he was already a billionaire. Early investors in Berkshire Hathaway could have bought in as low as $275 a share and by 2014 the stock price had reached $200,000, and was trading just under $300,000 earlier this year.

Comparing Buffett to Graham.
Buffett has referred to himself as "85% Graham." Like his mentor, he has focused on company fundamentals and a "stay the course" approach – an approach that enabled both men to build huge personal nest eggs. Seeking a seeks a strong return on investment (ROI), Buffett typically looks for stocks that are valued accurately and offer robust returns for investors.
However, Buffett invests using a more qualitative and concentrated approach than Graham did. Graham preferred to find undervalued, average companies and diversify his holdings among them; Buffett favors quality businesses that already have reasonable valuations (though their stock should still be worth something more) and the ability for large growth.

Other differences lie in how to set intrinsic value, when to take a chance and how deeply to dive into a company that has potential. Graham relied on quantitative methods to a far greater extent than Buffett, who spends his time actually visiting companies, talking with management and understanding the corporate's particular business model. As a result, Graham was more able to and more comfortable investing in lots of smaller companies than Buffett. Consider a baseball analogy: Graham was concerned about swinging at good pitches and getting on base; Buffett prefers to wait for pitches that allow him to score a home run. Many have credited Buffett with having a natural gift for timing that cannot be replicated, whereas Graham's method is friendlier to the average investor.

Buffett Fun Facts.
Buffett only began making large-scale charitable donations at age 75.
Buffett has made some interesting observations about income taxes. Specifically, he's questioned why his effective capital gains tax rate of around 20% is a lower income tax rate than that of his secretary – or for that matter, than that paid by most middle-class hourly or salaried workers. As one of the two or three richest men in the world, having long ago established a mass of wealth that virtually no amount of future taxation can seriously dent, Mr. Buffett offers his opinion from a state of relative financial security that is pretty much without parallel. Even if, for example, every future dollar Warren Buffett earns is taxed at the rate of 99%, it is doubtful that it would affect his standard of living.

Buffett has described The Intelligent Investor as the best book on investing that he has ever read, with Security Analysis a close second. Other favorite reading matter includes:
Common Stocks and Uncommon Profits by Philip A. Fisher, which advises potential investors to not only examine a company's financial statements but to evaluate its management. Fisher focuses on investing in innovative companies, and Buffett has long held him in high regard.
The Outsiders by William N. Thorndike profiles eight CEOs and their blueprints for success. Among the profiled is Thomas Murphy, friend to Warren Buffett and director for Berkshire Hathaway. Buffett has praised Murphy, calling him "overall the best business manager I've ever met."
Stress Test by former Secretary of the Treasury, Timothy F. Geithner, chronicles the financial crisis of 2008-9 from a gritty, first-person perspective. Buffett has called it a must-read for managers, a textbook for how to stay level under unimaginable pressure.
Business Adventures: Twelve Classic Tales from the World of Wall Street by John Brooks is a collection of articles published in The New Yorker in the 1960s. Each tackles famous failures in the business world, depicting them as cautionary tales. Buffett lent his copy of it to Bill Gates, who reportedly has yet to return it.

The Bottom Line.
Warren Buffett’s investments haven't always been successful, but they were well-thought-out and followed value principles. By keeping an eye out for new opportunities and sticking to a consistent strategy, Buffett and the textile company he acquired long ago are considered by many to be one of the most successful investing stories of all time. But you don't have to be a genius "to invest successfully over a lifetime," the man himself claims. "What's needed is a sound intellectual framework for making decisions and the ability to keep emotions from corroding that framework."

August 04, 2020

How to Create a Profitable Property Portfolio

How to Build a Diversified Portfolio.

“Don’t put all your eggs in one basket” is sound advice in life as well as in finance. Diversifying an investment portfolio can help cushion the ups and downs of the market and the broader economy. You can diversify by investing simultaneously in different asset classes. These classes include stocks (or "equities”), bonds, the money market, commodities, precious metals, real estate, gemstones, fine art and any of several other valuable assets. Because most growth in wealth comes from owning stock, equities also represent the most risk in a portfolio, so you will want to diversify your stock holdings. The following article presents a number of commonly acknowledged steps in building wealth through a diversified investment portfolio.

Method 1 Diversifying in Stocks.
1. Invest in many different companies. When you buy stock, you buy a share of the ownership of a company. You can buy stock in individual companies by using an online broker, such as E-Trade, Charles Schwab or TD Ameritrade (among many others). Do not, however, commit a large portion of your money to any single company. If such a company were to get in trouble, you could lose most of your money.
For example, Snap Inc. received a lot of press when it went public in March 2017 with shares priced at $27. However, by the following August the stock price had fallen to $11 per share. That's a drop of about 60%, which would have really hurt someone who had invested a large amount of money at the opening price.
To avoid such a disaster, limit your investment in any one stock to 5% or (preferably) less of your total portfolio.
2. Invest in different sectors. Entire industries often rise and fall as a unit. If the price of oil surges, most oil-related stocks will rise as a group. When the price of oil dips, oil-company stocks tend to fall together. You can protect yourself against this risk by investing in several different industries or sectors of the economy.
Major sectors include technology, health care, financial services, energy, communication services, utilities and agriculture.
The industries or sectors you choose should have a low correlation to each other. That is, invest in various sectors whose stock prices tend to fall at different times.  For example, technology and communication services might be too closely related. On the other hand, energy and health care are not closely related and might be expected to rise or fall separately.
3. Look at foreign stocks. As the economy in one country falters, the economy in other countries might be doing well. For this reason some experts recommend that you diversify by buying foreign stocks in addition to the domestic stocks you own.
Buying stock in multinational corporations automatically exposes you to international markets. For example, if you buy McDonald’s stock, you are already investing in foreign markets, since McDonald’s has expanded into more than 100 countries.

Method 2 Investing in Other Assets.
1. Diversify with bonds. When a company or government need to raise money, they may borrow it by issuing bonds to the public. A bond is a promise to repay borrowed money, accompanied by a certain amount of interest. Owning bonds is a good way to hedge against equity risks, because bond values tend to move in a direction opposite to stock values in general.
You can buy individual bonds or invest in a bond mutual fund. A bond fund holds a portfolio of many different corporate or government bonds. Research a fund to see how diversified its holdings are before buying shares. As with equities, bond diversification is very desirable.
Bonds are rated based on the issuer’s creditworthiness. Find bond ratings at Moody’s or Standard & Poor’s credit-rating services. A highly-rated bond will offer a lower interest rate but a higher likelihood of repayment. Choose bonds or bond funds that reflect your tolerance for risk. An aggressive investor (whose risk tolerance is high) might choose bonds with a higher interest rate but a lower safety rating.
2. Invest in U.S. Treasury bonds or bills for increased safety. U.S. Treasuries are the safest securities you can own. You lend money to the U.S. government and receive a promise for repayment. Treasury bonds often rise when the stock market falls, so they are a good way to diversify your portfolio.
3. Consider money market funds. Such a fund is similar to a savings account. The fund invests money in low-risk vehicles such as certificates of deposit and government securities. You can buy CDs and government bonds yourself, but a money market account can be more convenient, because it will do the investing for you at a nominal fee.
As an added benefit, some money market accounts let you write checks (or use a debit card) on the account. However, you will be limited in the number of withdrawals you can make per year.
4. Forget commodities. Some experts recommend diversifying by buying commodities such as oil, wheat, gold, and livestock. These commodities have no correlation to the stock market, so the value of these commodities should be unaffected if the stock market collapses. However, commodities are a poor bet if you are looking to buy and hold investments. Commodities are meant to be traded regularly and are therefore considered speculation (gambling) rather than investment.
5. Invest in real estate. One way to do this is to buy an apartment building and rent it to tenants. However, you may not have the time or energy to involve yourself in what can be a complicated endeavor. Instead you might invest in REITs, real estate investment trusts. With this option you invest in companies that own real estate. In exchange for your investment, you receive a share of the companies' income.
Many REITs charge very high fees, so they might not be the best way to diversify your portfolio.
Another option is to invest in a mutual fund that invests in REITs. This can save you a lot of research time by letting the fund managers do the research for you. You do pay for that service, of course, but it may be worth it to you if you value your time.

Method 3 Investing in Mutual and Other Funds for Diversity.
1. Diversify easily with mutual funds. A mutual fund is a portfolio operated by a fund manager. Buying into a mutual fund is a great way to diversify because each portfolio can hold multiple equities and other assets. For example, a mutual fund might hold stocks and/or bonds from 40 companies in various sectors. By buying into a fund, you can get instant diversification.
However, mutual funds are not automatically diversified. Everything depends on the assets held in the portfolio. Carefully analyze the individual holdings in the portfolio. Some mutual funds will be better diversified than others.
If you invest through an employer-sponsored plan (such as a 401k or an IRA), chances are you are investing in mutual funds.
2. Invest in an exchange traded fund (ETF). An ETF is like a mutual fund, except you buy it on a stock exchange, not from a fund. ETFs generally have lower fees than mutual funds, so they are a good option for investors.
As with mutual funds, an ETF is not automatically diversified. For example, you might buy an oil ETF, which is concentrated in one industry. Carefully analyze the underlying investments to make sure the ETF has the necessary diversity.
3. Consider an index fund. An index fund is a mutual fund designed to track an index, such as the Standard & Poor’s 500 Index or the DJ Wilshire 5000, which tracks the entire U.S. stock market. It is an easy way to get broad market exposure and thus diversify.
Remember that you want to diversify across asset classes. Don't forget bonds, Treasuries and the money market. Some funds do invest in these other assets.
Remember, too, that all mutual funds and ETFs charge fees for their service. Investigate the size of those fees before committing money. There are many good funds that charge total fees of less than 1% of your account balance, so there is no valid reason to pay more than that.  If you do your research, you should be able to find funds that are properly diversified.
With respect to equities, aim to hold at least 20 stocks spread across various sectors. You can invest by picking individual stocks, or you can more easily diversify by investing in a fund that contains hundreds of stocks and/or bonds.
4. Get expert advice. Every person’s situation is different, and there’s no one right diversification approach for everyone. Instead, you should meet with a "fee-only" financial advisor who can help you analyze your situation. Look for an advisor who is a certified financial planner (CFP). To earn this designation, candidates must meet certain experience, education, and ethics standards. The advisor should also be a fiduciary, someone legally bound to work primarily in your best interests. (Just ask, "Are you a fiduciary?" If you don't get an immediate "yes" for an answer, find another advisor.)
You can find a fee-only financial advisor through the National Association of Personal Financial Advisors. A fee-only advisor is one who does not earn a commission by recommending the purchase of specific financial products.
Discuss your investment goals with your advisor. Many people invest for retirement, and what qualifies as a well constructed portfolio will change over time. As an investor gets older, they will want to increase the ratio of bonds to stocks in their portfolio in order to diminish risk. (Some mutual funds can do that for you automatically.)

Method 4 Buying and Selling Intelligently.
1. Analyze your risk tolerance. How comfortable are you in taking financial risks? The more aggressive an investor is (the larger the rewards they hope to achieve), the larger the stock portion of their portfolio -- and the greater their risk tolerance -- will have to be.
A conservative portfolio might have only 20% in equities, 70% in bonds and 10% in cash and cash equivalents (including certificates of deposit, banker's acceptances, treasury bills and other money-market instruments).
A person more tolerant of risk might invest 70% in equities, 20% in bonds, and 10% in cash or cash equivalents.
2. Invest on a periodic basis. Let’s say you have $6,000 to invest in a year. If you invest all of that money at once, you might inadvertently buy into the market at a moment when equities are priced relatively high. A better option is to invest $500 a month. You would invest the same amount of money in a year's time, but as prices rise and fall, it's likely you would acquire a larger number of shares by year's end.
This type of investing is called “dollar-cost averaging,” and it allows you to take advantage of the inevitable price dips that regularly occur in the market.
3. Avoid market timing. You might dream of getting into the stock market at a price bottom and then selling at a peak. Many people who try to "time" the market in this way end up losing money, because recognizing a market peak or bottom isn't possible until after the fact.
4. Choose appropriate assets based on when you plan to withdraw investment income. For example, if you have 40 years before you plan on retiring, you can ride out peaks and valleys in the stock market. There’s less reason to worry if the market falls when you are in your 30s, because you have plenty of time to recoup your losses. A younger person can afford to be more aggressive in their investing than an older person.
5. Rebalance your portfolio when necessary. Building a diverse portfolio is not a one-time event. Instead, you may need to rebalance your portfolio periodically. Review your investments once a year, and see if they still align with your investment goals.
You might need to rebalance if some assets outperform others. For example, your equities might be on a hot streak for six years. Although they were 50% of your portfolio when you started investing, they now make up 70% through price appreciation. Assuming you still want stocks to form 50% of your portfolio, you’ll need to sell some stocks and replace them with bonds or other assets in order to maintain your preferred ratio.
Rebalancing might trigger tax consequences or transaction fees. Carefully analyze the process with your financial advisor before going ahead.
If you invest through a "balanced" mutual fund, they will typically do this rebalancing for you automatically. (A "balanced" fund invests in both stocks and bonds.)

Warnings.

Diversification can manage risk, but it cannot completely eliminate it. Diversification won’t save you if the entire market goes into a tailspin, as it did in 2008 and 2009. Nonetheless, diversifying is a critically important tool for all investors

April 01, 2020