Selecting Investments

Fundamentals of Market Investing by Adam J. McKee

When writing your investment plan, you will need to decide on an asset allocation mix that meets your return and risk requirements.  One way to approach this is to determine a risk level that you are willing to tolerate (as measured by the standard deviation of the price changes over a period of time, expressed as a percentage) and then search for asset classes that will provide you with an acceptable return within those risk parameters.  This process can be very time consuming since there are literally thousands of different investment options to choose from.  It is made easier by tools that can help you examine many assets at once and provide you with optimal allocations based on your criteria.

Depending on your account type, you will want to select index mutual funds or ETFs.  These funds have an ideal combination of within asset class diversification and low fees.  Always remember, very small fees can eat away very large chunks of your wealth.  This is in contrast with actively managed funds in which a manager tries to beat the market instead of merely track it.  Actively managed funds are a sucker’s bet the vast majority of the time, and the fees are always higher.  A very few exceptions may exist, such as when you want to track a growth trend that doesn’t have an index, such as “cloud computing.”  If you do decide to add something like this to your portfolio, keep the percentage very low and label it “speculative equities.”

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Last Updated: 6/25/2018

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