Follow Your Investment Plan, Not the Market

Concerned about what the stock market has been doing lately?

Don't be.

According to a recent survey by the American College of Financial Services, more than 60 percent of respondents are concerned about market drops in 2016.

It's hard not to be a little nervous when you get a statement showing that your retirement holdings have shrunk, say, 8 percent since the first of the year.

My advice is simple. Keep contributing. Sell nothing. If you have to, don't open those statements for a month or two.

There's only one caveat: If you are five years or less away from retirement and for some reason have a 401(k) that's 95 percent invested in mutual funds or other securities, you are not sufficiently protected from volatility. You have my permission to shift 60 percent of your portfolio into bonds, cash equivalents and other stable investments right this minute.

Remember the rule of thumb: 110 minus your age equals the percentage of a typical portfolio that should be in stocks (index funds or mutual funds). For a 30-year-old, it should be as much as 80 percent. For a 50 year old, 60 percent.

Otherwise, with more than five years for your money to grow, you are officially a long-term investor. And as a long-term, low-cost, value investor, you're not going to gain anything by chasing the market. There is no need to be focused on short-term fluctuations and even large corrections. Over time these things will smooth out. And time is on your side.

It's unfortunate that financial news focuses so much on the markets. It's surprising, too, since Gallup tells us that only a tick over half, 55 percent, of Americans actually own stocks. This is down from a high of 65 just percent before the financial crisis of 2008. Over the last near-decade, Americans who got out and stayed out of the stock market -- or those who never came in -- have missed out on a great deal of equity appreciation that they could have used to retire comfortably. By overreacting to the crisis, or by reacting for too long, these folks have cheated themselves out of the recovery.

The biggest swing has been seen among middle-class Americans and mid-career adults -- 35-54 year olds, and those making between $30,000 and $75,000 a year. Three out of four of both groups used to own stocks, and only 56 to 58 percent do now.

But when it comes to the wealthiest Americans? Almost 9 out of 10 have bought into stocks. Maybe that should tell you something.

There's another big-picture point to take from the current market, one that I'm planning on keeping in mind as I think about my investment strategy in the years and decades to come. The slowdown in China as well as the downturn in the U.S. market is reminding us that it's important to diversify internationally, and into emerging markets as well, through index or exchange-traded funds. Remember, about half of all quality stocks are found outside the United States.

It's a strange truth of our time that the big picture "economic" news can actually be running in the opposite direction from our personal financial fortunes.

Recently, consumer confidence has been good. Spending has been up slightly. Rates of default on debt are low and stable. So why is there so much nervousness among the financial sector?

Wall Street is crashing lately in part because the dollar is strong, making it harder for this country to export products, and because gas prices are low for a variety of reasons.

But a strong dollar means slightly cheaper imported goods in stores -- everything from Mexican avocados to Chinese shoes. And cheap gas -- well, I don't have to tell you why it's a nice thing to pay less at the pump. - Chicago Tribune

7 Investment Tips for a Seven-figure Retirement

Albert Einstein is rumored to have called compound interest “the most powerful force in the universe.” Whether he actually said it or not is irrelevant. People would be well served to act as if he did.

That’s the advice from Robert R. Johnson, president and CEO of the American College of Financial Services in Bryn Mawr, Pennsylvania and the co-author of “Investment Banking for Dummies” (Wiley, 2014).

Johnson provides this example:

“If a 35-year-old starts saving for retirement and puts $439 monthly into an account earning 10 percent annually, she will have accumulated $1 million by age 65. She will have made $158,040 in contributions and will have earned over $842,000 in compound interest. If that same individual waits until age 45 to start, she would have to up the monthly contribution to $1,306. She will have made payments totaling $313,440 and will have earned $686,560 in interest,” Johnson says.

While the 10 percent assumption may sound aggressive, Johnson says, since 1926, a diversified portfolio of large capitalization stocks has had an average annual return in excess of 10 percent.

Starting early is truly the key for building a secure retirement, Johnson says.

Another powerful tool is time, says Peter Lazaroff, wealth manager and director of investment research at Plancorp, LLC, in St. Louis, Missouri.

“Anyone that is turning away from stocks in favor of start-up investments and crowdfunding is taking on significantly more risk than a traditional stock and bond portfolio,” Lazaroff says. ”Time is the most powerful tool in finance, and leveraging the compound returns of a traditional stock and bond portfolio is the surest way towards financial success. It’s not particularly sexy, but good investments usually aren’t. Good investing is about hitting singles and taking walks. People who try to hit home runs will strike out more often than not.”

And while many people put saving for retirement last on the list of priorities because it is so far off in the future, it should be first on the list, Johnson adds.

“They first want to save for kids’ education, down payment for a home or home improvements, pay off credit cards, etc.,” Johnson says. ”For instance, they say ‘nothing is more important than my child’s education.’ There are many options for a child’s education – student loans, going to a less expensive state school, etc. Once someone hits retirement and hasn’t saved enough, the options are unattractive – work longer and/or scale back on your lifestyle.”

Even when there are employer-sponsored opportunities to save for retirement, many people do not take them.

“The 25th annual Retirement Confidence Survey completed in 2015 by the Employee Benefit Research Institute showed that 71 percent of all workers had some type of retirement program offered by their employer, but that only 40 percent of them made contribution to these plans even when an employer match was available,” noted Keith Baker, a mortgage banking professor at North Lake College in Irving, Texas.

Given the importance of time, prioritizing and the power of compound interest, just how should a person in her 30s or 40s save for and invest their money to have $1 million awaiting them for retirement? Johnson, Lazaroff and Baker provide seven tips for that seven-figure investment plan below:

1. Get Professional Help

“Crafting and carrying out a retirement income plan is difficult,” Johnson says. “People should establish a relationship with a financial advisor to help guide them through the complex retirement landscape.” Johnson suggests seeking trusted advisors holding a well-respected financial credential such as the Chartered Financial Consultant (ChFC), Certified Financial Professional (CFP) or Retirement Income Certified Professional (RICP) designations. Lazaroff suggests that people only work with a financial advisor that is a fiduciary and regulated by the SEC: “If they aren’t regulated by the SEC, then the advice they provide is held to weaker standard that allows them to sell products that may not truly be in your best interest.”

2. Perform a Spending Plan

“Start by keeping a log of what your cash outflows are in detail for 2 months,” Baker says. “Have a goal of reducing less than necessary spending to save an additional $400 per month. At a 7 percent return this would create $516 627 by age 65 if you started at age 30 or $1,030,589 if you had an employer that would match your $400 per month.”

3. Don’t Spend Your Raises, Save Them

A recent Mercer study has shown that the average raise over the past 5 years has been around 2.8 percent, Baker says. This would translate into an additional $150 per month in savings if you put it into an IRA or as an additional contribution to a 401(k) plan. Take $150 of each subsequent raise and add it to the original $150. This compounded over a 25 year period from age 40 to 65 at a 7 percent return would be $1,096,462 starting off saving $1,800 in year 1 and $45,000 in year 25.

4. Examine Your Housing Cost Profile

Many individuals have not moved into the most cost effective housing. Says Baker: “I am not advocating for the ‘Tiny House Nation’, but smaller energy efficient housing closer to work can allow additional funding for retirement. Just because you can qualify for a mortgage when your housing to income ratio is 28 percent and you make $100,000, it doesn’t follow that you should be spending $28,000 a year on you home payments. If you could reduce your housing cost by $11,000 a year at age 35 and save the difference in an IRA or 401(k) at 7 percent, you would have $1,078,063 by age 65.”

5. Be Brave

Don’t be conservative when setting your asset allocation, Johnson suggests: “Time is your greatest ally when you are attempting to accumulate wealth. Over the long run, stocks have beaten bonds in performance over every 20 and 30 year period in US history. While that isn’t guaranteed to happen in all time periods in the future, the odds are overwhelmingly in your favor.”

6. Stay Invested Through Both Good and Bad Markets

“Time and compound interest will reward you for your patience,” Lazaroff says.

7. Take Full Advantage of Tax Deferred Accounts

“The only thing better than compound interest is compound interest without taxes,” Lazaroff says. ”Taxes shrink your return, so try to contribute the maximum allowable amount to company retirement plans and IRAs. - Sioux City Journal

'Game of Thrones' Has Banker Fretting Over Malaysia's Future

Malaysia's government seeks to shut the door on one funding furor, another opens. Rolling scandals that have hit the country for seven months have the premier's brother, a senior banker, likening the climate to HBO's "Game of Thrones".

The future for Malaysia "terrifies" him, Nazir Razak wrote in an Instagram post on Saturday. That was a day after the Swiss Attorney General's office said a probe of debt-ridden government investment fund 1Malaysia Development revealed "serious indications" that about $4 billion may have been misappropriated from state companies in the Southeast Asian nation.

Just last week, Malaysia's attorney general cleared Nazir's elder brother, Prime Minister Najib Razak, of wrongdoing in receiving a $681 million personal donation from the Saudi royal family in 2013, as well as funds from a company linked to 1MDB. Of the Saudi funds, $620 million was later returned.

Malaysia will cooperate with Swiss authorities and review the findings before determining a course of action, Attorney General Mohamed Apandi Ali said on the weekend. 1MDB said it hasn't been contacted by any foreign legal authorities. Najib is "not one of the public officials under accusation," Andre Marty, a spokesman for the Swiss attorney general's office, said Monday in a statement.

The premier's office declined to comment on the matter or on Nazir's comments. The prime minister said after his exoneration by Apandi that the Saudi donations probe was an "unnecessary distraction" for Malaysia.

As some overseas probes continue into 1MDB -- whose advisory board Najib chairs -- questions have been raised by opposition lawmakers and Najib's critics over the robustness of agencies overseeing Malaysia's governance. The imbroglios have led to calls for Najib's ouster from the opposition and former premier Mahathir Mohamad, and recalled Malaysia's decades-long struggle with corruption and money politics.

"The parallels with Game of Thrones continue," wrote Nazir, chairman of CIMB Group, one of the country's biggest lenders. "I just can't see how our institutions can recover, how our political atmosphere can become less toxic, how our international reputation can be repaired."

On Monday Nazir said he did not wish to comment further. Nazir and Najib have been seen interacting at public events and Nazir posts some of those pictures on his Instagram account.

The scandals come at a time growth and investmentare slowing. Investments in manufacturing, services and primary sectors fell 15 percent in the first nine months of 2015 compared with the year before. The government last week trimmed its growth expectations for 2016.

"With the economy flagging, inflation rising and markets losing ground, the policy challenges are growing, exacerbated by the latest falls in the oil price," Christine Shields, lead economist at Oxford Economics, said in a January report. "Despite strong policy discipline and good technocratic management, strains are emerging."

Perched on the lower end of peninsular Southeast Asia, Malaysia is a conduit for trade between Europe and Asian economic powers like Japan and China. Bigger in area than all but four U.S. states, Malaysia is a net oil and gas exporter and the world's second-largest producer of palm oil.

Malaysia's score worsened in Transparency International's Corruption Perceptions Indexfor 2015 released last week, putting it on a ranking near Slovakia, Kuwait and Cuba. Issues related to 1MDB contributed to the nation's fall on the global list to 54th from 50th in 2014, according to the Malaysian head of Transparency International.

In November, Nazir posted a picture on Instagram of his first investor roadshow in London in 1992, saying he had "been promoting Malaysia for a long time and it has never been tougher than now due to 1MDB and related issues." Foreign investors pulled 30.6 billion ringgit ($7.3 billion) from stocks and bonds in 2015 and helped send the currency to a 17-year low.

Najib has faced challenges before, including the campaign by Mahathir to get him out. In power since 2009, Najib has removed detractors including his deputy premier and an attorney general who was part of a team investigating the funds that went into his personal accounts. He silenced critics at a meeting of the ruling party in December and is wooing the ethnic Malay majority by bringing his United Malays National Organisation closer to the main opposition Islamic party.

"It's not uncommon to see changes in top positions in Malaysia," said Samsul Adabi Mamat, a political science lecturer at the National University of Malaysia. "It's a smart move for any leader to strengthen his leadership machinery, and when that is done, policy implementation will all be in the same direction."

1MDB has consistently denied wrongdoing, or transfers of funds to Najib. It agreed in November to sell its power assets to a Chinese company in what many see as moving it a step closer to winding down operations.

Malaysian authorities have been waiting to hear from Swiss prosecutors for many months on 1MDB, Communications Minister Salleh Said Keruak said Tuesday in a statement. The "premature" statements from the Swiss Attorney General's office appear to have been made without the full facts, Keruak said.

In response to queries on 1MDB, Singapore said Monday it had seized a "large number" of bank accounts in connection with possible money-laundering carried out in the country.

"Malaysia could come to be misunderstood despite its potential" as 1MDB pops up on international news headlines time and again, said Wellian Wiranto, an economist at Oversea-Chinese Banking Corp. in Singapore.

Najib, who has the support of the bulk of UMNO divisional chiefs, has time to regain the trust of voters. But it's crucial for him to revive the economy, said Norshahril Saat, a fellow at the ISEAS-Yusof Ishak Institute in Singapore who has studied Malaysian politics for a decade.

"This is a test of how the government can communicate with the public effectively," he said. "Society constantly wants answers." - Chicago Tribune

Is It Ever A Bad Time To Invest?

When the markets seem scary, it's tempting to wait for a "better" time to invest. History suggests this may be a mistake.

Many investors feel nervous about making a commitment to equities, particularly following robust periods of market performance. There are always economic clouds on the horizon, and no one wants to envision their investments taking an immediate loss. But trying to "time the market" by waiting for a more opportune time to invest may be a mistake, as time horizon has often been a significant factor in long-term market results.

We would all time the market if we could do it successfully. Who wouldn't want to avoid major market declines or fully participate in a bull market? The problem is that market timing requires one to make decisions that even professionals find difficult, if not impossible. This is not to say that considering the overall direction of the markets and making tactical tilts aren't without merit. Trying to time one's overall exposure to the equity market, however, brings with it a new set of risks, and may ultimately derail an investor's long-term goals and objectives.

The Pitfalls of Timing

Individual investors are notoriously bad at picking the right times to invest. Fund flows show that investors tend to move in and out of the market at precisely the wrong time - in essence, buying high and selling low. In 2008 and 2009, for example, during the depths of the bear market, investors pulled significant assets out of equity funds. Several years later, they moved back into equity funds just as many equity indexes were approaching or had surpassed old highs (see Figure 1).

Figure 1: Market Timing Travails

Source: Strategic Insight Simfund MF, FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

In fact, the patterns of overall equity market returns are one of the reasons that market timing is so difficult. Market increases have often come in spurts, and missing some of the market's best days could have a significant impact on returns, as those days have historically accounted for a surprising portion of the market's overall annual returns (see Figure 2).

Figure 2: Impact of Missing Equity Market's Best Days

S&P 500 10 Years Ending October 21, 2015

Source: FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Over Time, Stocks Have Tended To Go Up

Over extended periods of time, the U.S. stock market has tended to rise in value. Consider Figure 3, which shows that the S&P 500 has risen in 75% of all one-year time periods since reliable market data began (in 1926). Over longer periods, the percentage of positive outcomes has also increased as well - for example, there has been no 15- or 20-year period in the S&P 500's history in which the index has registered a negative return. Figure 4 shows the S&P 500's performance over rolling 10-year periods (that is, the 10-year periods ending in 1935, 1936, 1937 and so on). In only two instances - ending in the depths of the Great Depression and in the midst of the global financial crisis - did the S&P 500 produce negative returns after a 10-year holding period. We believe this underscores the importance of maintaining a long-term perspective.

Figure 3: The Percentage of Positive S&P 500 Outcomes Has Varied by Holding Period

Source: FactSet. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Figure 4: Benefits of Long-Term Investing

S&P 500 10-Year Rolling Returns

Source: FactSet. Data as of October 31, 2015. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Managing Risk Through Diversification

Of course, the case for any given asset class only goes so far. Maintaining diversification is another way to help mitigate the downside risk of an overall portfolio. Investors have often relied on a mix of stocks and investment-grade bonds for this reason. In the current low-yield environment, however, we favor diversification across a broader asset allocation framework that reaches beyond traditional equities and fixed-income to enhance diversification against broad market risk.

Investors today also have access to a broader array of investment options that can provide diversification benefits. For example, once the province of institutions and wealthy individuals, alternative investment strategies are now increasingly available in vehicles without investor qualification restrictions. So-called "liquid alternative" funds are retail mutual funds that pursue alternative investment strategies. Adding alternatives strategies to a portfolio of traditional equity and bond investments can help lower correlations to equity and fixed-income markets. Given the significantly expanded range of alternative strategies available today to a broad audience, adding the potential diversification benefits of non-traditional approaches has become a simpler exercise.

Climbing The Wall Of Worry

Over time, the stock market has managed to navigate periods of economic crisis and geopolitical uncertainty and has overcome significant market pullbacks. Although the global economy continues to expand at a moderate pace, helped by the stimulative efforts of central banks, the proverbial wall of worry stands high today. The Federal Reserve's potential tightening cycle, China's slowing growth trajectory, weak commodity markets and elevated valuations are just a handful of concerns that have investors pondering a move to the sidelines.

The angst investors feel in the current environment is understandable, and behavioral tendencies can be difficult to resist. Working with a financial advisor can provide investors with a long-term perspective and help them make decisions based on goals, objectives and risk tolerance rather than emotion. - Nasdaq

This material is provided for informational purposes only. Nothing herein constitutes investment, legal, accounting or tax advice, or a recommendation to buy, sell or hold a security. The views expressed herein are generally those of Neuberger Berman's Investment Strategy Group (ISG), which analyzes market and economic indicators to develop asset allocation strategies. ISG consists of a team of investment professionals who consult regularly with portfolio managers and investment officers across the firm. Indexes are unmanaged and are not available for direct investment. Investing entails risks, including possible loss of principal. Past performance is no guarantee of future results.

Investment Tip: Asset Allocation Needs To Be Based on Ultimate Goal

The goal of diversifying one’s investment portfolio is to reduce risk and enhance returns.

The goal of diversifying one’s investment portfolio is to reduce risk and enhance returns. Certain types of asset classes offer higher return potential but carry more risk. For example, equities are more volatile than fixed income securities, but historically have provided higher returns and capital appreciation. Fixed income or debt securities offer income and relative stability, but tend to have lower return potential. Benefits of different asset classes with low correlations can be combined in an asset allocation-based portfolio with a target level of risk that meets your investment goals and risk tolerance while avoiding the risks associated with putting all your eggs in one basket.

Your asset allocation strategy can be aggressive, conservative, or somewhere in between depending on individual investment goals, time horizon, and risk tolerance. Depending on your age, lifestyle, family commitments and liabilities, your financial goals will vary. You need to define your investment objectives such as buying a house, financing a wedding, paying for your children’s education or retirement before determining a relevant asset allocation.

As an example, a retired individual who no longer receives steady monthly paychecks, may resort to a conservative asset allocation with nearly 85% of the assets in low risk stable income generation products such as debt instruments and cash management products and a low allocation to higher risk asset classes such as equities. Conversely, an investor who does not need money for 25 years and is saving for retirement, seeking high capital appreciation, may have a more aggressive asset allocation with nearly 75% or higher allocation to equities and a relatively low allocation to debt instruments and cash.

Periodic reviews

While an asset allocation plan eliminates a lot of the day-to-day decisions involved in investing, it doesn’t mean you just set it and forget it. Reviewing your portfolio regularly with your financial advisor to monitor and rebalance asset allocation can help make sure you stay on track to meet investment goals.

No matter what allocation you select, it’s important to review your portfolio every 6-12 months to review your progress. But this process requires effort and discipline to track the periodic performance and review of asset classes and incorporate disciplined rebalancing. But given behavioral biases of humans and a lack of consistent investment discipline, asset allocation may drift away and pose adverse risks due to asset class concentration. Another common mistake on part of investors is to follow recent trends of the performance asset classes and succumb to herding while making investment decisions. Furthermore, disciplined rebalancing done periodically helps investors harvest a rebalancing premium and earn superior returns compared to investment portfolios that are not rebalanced periodically.

Asset allocation plan

Asset allocation, while relatively simple in theory, is difficult in practice. Allocation has to be reviewed every 6-12 months and periodically rebalanced. However, to mitigate the challenges such as a lack of investment discipline and the tendency of behavioral biases that may influence and introduce potential mistakes in asset allocation, investors may also consider asset allocation based fund-of-funds solutions that have in-built strategic and tactical allocations to different asset classes based on simple and well-defined rules.

Asset allocation is a potent solution for investors to build well diversified investment portfolios that aim to deliver superior risk adjusted returns that outpace inflation over the long haul. Embrace principles and discipline of sound asset allocation as you embark on the journey for long term wealth creation and wealth preservation. - Financial Express

5 Smart Retirement Moves You Can Make in 2016

Do everything you can to boost your retirement prospects.

Making sure you save enough to retire comfortably is an essential part of your financial planning. Whether you're just getting started or are a seasoned veteran, it's a good idea to make 2016 the year in which you make substantial progress toward reaching your retirement goals. Below, you'll find several ideas to make your retirement dreams a reality.

1. Give your saving a raise.
If you were fortunate enough to get a year-end bonus or salary increase for 2016, one smart thing to do is to use at least part of it to increase the amount you save for retirement. Boosting your 401(k) contribution by a single percentage point can add an additional five-figure or even six-figure amount to your retirement nest egg over the course of a career, and if it makes you eligible to get an even larger matching contribution from your employer, that's even better. Whether you use an employer-based plan or contribute to an IRA, putting more aside in 2016 will get you on the road to prosperity more quickly.

2. Get your debt under control.
The closer you get to retirement, the less debt you should have on your personal balance sheet. Once paychecks stop coming in, so too does most of the monthly income you used to make interest and principal payments. Getting high-rate debt like credit card balances paid off is paramount, but even less onerous debt like a mortgage or student-loan payments should be targets for elimination before you reach retirement age. If you can reach that goal, it will make it much simpler to make ends meet in retirement.

3. Assess your long-term care needs.
Healthcare expenses can be a huge burden in retirement, and many people make the mistake of thinking Medicare covers all of their potential healthcare costs. One thing Medicare doesn't cover is long-term care, and you'll need separate insurance coverage in order to make sure you don't bear the full burden of all of those expenses. Long-term care insurance has been a tough market for insurers, so it could be hard to get the coverage you want at the price you'd like to pay. The earlier you start looking, the more affordable long-term care insurance will be.

4. Start planning a retiree budget.
It's easy to focus solely on the investing side of retirement, but the other side of the equation is just as important. Knowing how much you anticipate spending after you retire can help you define exactly how much money you need to accumulate during your career. If you can find ways to cut your spending without sacrificing your quality of life, then it could allow you to retire that much sooner. From downsizing a home to considering a move to a lower-cost location, thinking about your retirement expenses can awaken a creative instinct and make thoughts of retiring much more exciting.

5. Plan your Social Security.
As retirement approaches, you'll want to look at all of your potential income sources. The majority of Americans rely on Social Security for at least half of their retirement income, so it's important to be smart about when you plan on taking your benefits and how family dynamics come into play. Whether you decide to take Social Security at your earliest opportunity, at age 62, or wait until age 70 to boost the size of your monthly payments, knowing the ropes of how Social Security works is essential to your financial security.

Being smart about retirement means taking advantage of everything in your financial arsenal. Investing better, controlling your costs, and protecting yourself from unexpected financial catastrophes are all important in order to put together a plan for your retirement that you can live with. - The Motley Fool

5 Qualities That Will Make Or Break Your Portfolio

Follow these steps to long-term investment success

Many investors build their portfolio with the same methods that they use to cook at home. Throw together a combination of ingredients in varying quantities to create a seemingly cohesive meal. Yet at the end of the day, they probably don’t think about carefully measuring how this result was achieved or what took place to bring these individual items to a tasty conclusion.

Having a sound portfolio management plan is achieved with the same measured approach that a perfect recipe might be conceived.

It takes time, tools, and discipline to implement properly. Furthermore, there are important qualities that must be reasoned and balanced to fit with your long-term objectives.

I have written about many of these qualities individually in great detail.

Nevertheless, it endures repeating how these important elements can make or break your portfolio.

1. Investment Style – It’s important to define your investment style so that you understand its strengths and weaknesses. Some investors buy-and-hold for the long-term, while others are short-term traders. There are trend followers, value investors, technical mavens, fundamentalists, short sellers, and many others.

There is no holy grail in the stock market. Each of these systems will have periods when they shine and periods when they fall flat. Yet if you know what the downsides to your strategy are, it will make it easier to ride out the difficult moments and avoid stepping away from your core beliefs during periods of stress.

2. Security Selection – Some investors are keen on individual stocks, while others love ETFs, mutual funds, or options. The merits of each can be debated at length, but how you research and assemble these positions together will be your biggest driver of risk and return. My personal preference is to use ETFs for their low-cost, transparency, diversified holdings, and liquidity.

Remember that risk is always a double edged sword. It cuts in both directions. The same drivers of volatility and downside price action can also create periods of swift and massive gains.

Micro cap stocks have greater risk than large cap stocks. High yield bonds have different risk characteristics then treasury bonds. Those dynamics must be weighed and calculated in order to properly diversify or concentrate your asset allocation in the areas you feel will offer the greatest opportunity for stability or capital appreciation.

3. Position Size – Position size is probably one of the most important and overlooked areas of portfolio management. It can have a tremendous impact on your net returns. Some like to diversify amongst a great deal of smaller positions to mitigate certain risks, while others are more comfortable making big bets on single names.

I always love to ask those that crow the loudest about their top stock or asset class how big the position is in order to determine how much that contributed to real returns. A 1% position that gained 100% isn’t going to provide the same boost to your net worth that a 20% position will.

Remember that your biggest positions are the ones you have to watch the closest.

4. Risk Management – There are many different ways to manage risk. Diversification, asset allocation, hedging, and stop losses are just some of the more popular options that many investors implement.

The thing about risk management is that the more measures you utilize, the more active you are going to have to be in order to constantly adjust for their impact. Each investor must carefully analyze the benefit of risk measures designed to safeguard capital against the cost of their end result.

For instance, a stop loss can help you move to cash when a position is heading south. Yet that same investment may ultimately trip your safe guard and reverse course while you are stuck on the sidelines. For some investors, that safety net is more important than trying to catch every twitch in the market.

5. Emotional Fortitude – One of the biggest risks that investors face are themselves. From a psychological standpoint, investors tend to get greedy when things are going well and fearful during periods of stress in the market. That vicious cycle can wreak havoc on your portfolio and cause you to deviate from your investment system.

In my experience, the most successful investors are able to look at the market with a counterintuitive mindset that allows them to capitalize on volatility. They also insulate themselves from the roller coaster ride of euphoria and panic.

It’s essential to control emotional triggers that lead to anxious decisions at inopportune times. Reducing stress may involve stepping away from the market or making incremental changes with calculated parameters to avoid full blown capitulation. - InvestorPlace