When it comes to creating a stable financial portfolio, there are really only two fundamental goals you need to keep in mind. You want to maximize your potential for return and you want to minimize your exposure to risk. By creating opportunities for growth and avoiding situations that may result in loss, you can be poised for financial success.
But though knowing what to do may seem relatively simple, knowing the best way to do it is clearly a much harder task. After all, if investing were really so easy, it seems that just about everybody would be rich by now. The world of finance is constantly changing, and finding the best investment to meet your needs can be almost impossible to do with any sort of absolute confidence.
Adhere to the principle of diversification.
In the world of finance, there are generally two main kinds of risk. There is systematic risk—risk that applies to every portfolio no matter what its contents may be—and there is risk that can be diversified away.
If you ask any financial advisor, they will be sure to tell you that diversification is one of the most important principles throughout the entire industry. Instead of investing all of your capital in one kind of stock or one kind of asset, you are going to want to invest in as many different kinds as you feasibly can.
By investing in stocks, bonds, real estate, life insurance, and other financial assets, you can protect yourself from future risk. Additionally, there are several different ways you can diversify even further.
- Invest in an index fund that purchases a wide variety of stocks at the same time
- Simultaneously be buying stocks and shorting stocks to protect yourself from changes in the overall stock market
- Consider investing in international markets to protect yourself from country-specific risk
The stock market—and most other capital markets—are generally growing over time. But when it comes to specific assets, some will grow while others stay the same or decline. By taking actions to diversify, you won’t become entirely dependent on the performance of an individual asset. Instead, you can enjoy the benefits of the market’s general trends.
Take actions to improve your credit score.
As an individual investor, your credit score will naturally influence your ability to attain any lines of credit. If you are trying to minimize the risk of your financial portfolio, you are going to want to make credit as attainable as you possibly can. If you have any outstanding debts, Freedom Debt Relief might be able to help.
Typically, when you have a better credit score, you will be able to secure loans with better interest rates. As a result, the more expensive it becomes to secure a loan, the more money you will need to make on an investment in order for that investment to be ‘worth it’.
With a good credit score, you can secure better mortgages, have access to more capital, and have a wider range of potential investments to choose from. Someone who can earn a 10% annual return on an investment with capital secured through a 5% APR loan will have a much better risk-reward ratio than someone who makes the same 10% annual return investment with capital secured with an 8% APR loan.
When it is less expensive to acquire money to invest, the investment itself becomes inherently less risky. If you are hoping to improve your credit score for the sake of investing, you should begin by making sure that all of your credit payments are being made fully and on time.
Freedom Debt Relief has a team that is willing to find solutions that could work for you.
Learn to prioritize your debts.
It is not unusual for individuals with well-managed finances to still be holding onto several sources of debt. However, with the exception of a random coincidence, it is very unlikely that all of your sources of debt will be accumulating interest at the exact same rate.
For the sake of your credit score, it is generally a good idea to at least be making the minimum monthly payment on all of your sources of debt. But, when possible, it also generally a good idea to pay even more.
When all else is equal, you typically want to pay off your largest debts and your most expensive (highest interest) debts first. For example, suppose debt A is $1,000 and growing at 2% per month, and debt B is also $1,000 and growing at 4% per month. Doing nothing this month will cause debt A to grow by $20 and debt B to grow by $40. If all else is equal, you are going to want to pay off debt B first.
You should also consider the size of the debt. A $100,000 debt growing at 2% per month will accumulate more monthly interest than a $1,000 debt growing at 4%. This is where portfolio balancing can become rather tricky. But in general, by prioritizing the debts that are the most costly to maintain, you will reduce the overall risk of your financial portfolio to a greater extent than if you paid off your debts indiscriminately.
Freedom Debt Relief is a top debt resolution company that is designed to significantly reduce the amount of debt you currently owe. Though the solutions they can offer you will obviously depend on your individual situation, their knowledgeable staff could help you prioritize your debts and be exposed to less financial risk.
Try to avoid micromanaging your assets.
One thing that many people tend to do when they first start engaging in the world of financial activities is micromanage their assets. They will often feel as if they have a firm understanding of the market, and assume they will be able to find the stock or financial asset that will immediately catapult them to wealth. However, paying broker fees and other costs associated with trading simply means that in order to make the same amount of money, you are going to have to find something with an even greater rate of return than before.
Though some people are able to ‘make it’, it is generally not a good idea to assume you can outsmart the market. Again, if investing were really so easy, everyone would by rich. Typically the best—and consequently, least risky—portfolios are not the ones that are trying to succeed overnight. They are the ones that are committed to steady, deliberate, and diversified growth.
Even if you are currently in debt, financial success is still quite attainable. In fact, working with Freedom Debt Relief may be exactly what you need to help. But you are going to need to be patient. By carefully managing your debts, allowing your investments to have some time to grow, and being mindful of your portfolio’s riskiness, you can begin moving in the right direction.
Co-founded founded in 2002 by Andrew Housser and Bradford Stroh, Freedom Financial Network offers a range of online financial services aimed at helping consumers achieve financial freedom. The companies in the network include Freedom Debt Relief, the nation’s largest debt relief company; FreedomPlus, a lending platform that offers unsecured personal loans; and Bills.com, an online consumer finance portal and mortgage marketplace. Based in San Mateo, California with an office in Tempe, Arizona, Freedom Financial Network is committed to leading the industry and setting the pace for the highest business standards.