“This stock is hotBuy this right now!It’s going to go higher. ”
If you watch TV or read the news about the stock market that’s pretty much what journalists, “specialists” and “gurus” tell you. It seems that their strategy almost always consists in taking advantage of short time fluctuations. They pretty much makes you believe that one “smart investment” can make all the difference in your life and makes you rich overnight.
The reality is that if you play this short term game, you will almost always lose the game. Why? Well for 2 reasons:
- Short-term investments require to keep a close eye on what’s happening on the market in real time. People who do short-term investments are often professionals who do it full time. If you have a 9-5 job, it makes it very hard for you to make money in these conditions.
- Short-term investments involve trading stocks regularly, which means paying a transaction fees every time you do so. These fees can quickly add up and make you lose a lot of money not to mention the taxes that are often higher for these kind of investments.
Short-term investment is appropriated if you like gambling and taking risks but it’s not a sustainable strategy if you want to make money in the long run.
To win the money game you need to think long term, you need to think asset allocation and compounding.
The wealthiest and most brilliant investors on the planet such as Warren Buffett (net worth: 66.7 billion USD), Carl Icahn (net worth: 21.3 billion USD), Ray Dalio (net worth: 15.4 billion USD) all think long term. And because they all hate losing money they avoid short term investments. Instead they allocate their assets to get the maximum return on their investments while minimizing the risks.
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You must probably ask yourself how exactly they allocate their assets. Well here’s Ray Dalio’s asset allocation recommendation (source: Money Master the Game):
First you need 30% in stocks (for instance, Motley Fool picks or the S&P 500 for further diversification). It may sounds low but it makes sense when you know that stocks are three times more risky than bonds.
Then you need long-term government bonds, 15% in intermediate term (7- to 10-year treasuries) and 40% in long term bonds (20- to 25 year Treasuries).
Lastly round up the portfolio with 7.5% in gold and 7.5% in commodities
Your portfolio must be rebalanced at least every year, which means that when one segment does well, you must sell a portion and reallocated back the the original allocation.
Investing can sometimes be scary and stressful. However, if you follow closely these guidelines, you will automatically avoid the stock market roller coaster and get a better return on your financial investment while enjoying the magic effect of compounding.
Before planning to invest on something, be sure to make adequate personal research that can help you – an investor – out.