To build upon the basic beliefs outlined in my previous post, I am going to outline several investing principles. Initially these investing principles will be generic in nature and serve as framework for the more specific concrete action you could take later.
1. Diversification is not a theoretical term and it really works. You have heard the old saying "Don't put all your eggs in one basket" and that is essentially diversification. Diversification can be looked at various levels, Owning different Asset Classes and diversifying within Asset Classes.
What is an Asset Class?
If you do not know what an Asset Class is please read this definition in Investopedia.
Now if take an Asset Class like Stocks you can further diversify within that asset class by owning different kinds of stocks. They could different by market capitalization, sectors, geography etc. However the key principle is you need to diversify your investments across multiple asset classes and even better asset classes that are not correlated to each other.
What is Asset Correlation?
In its simplest form you need asset classes that behave differently or if one rises other falls or remains stable.
2. Stocks or Equity should be the core and a major portion of your investments. Building on the basic belief that world class companies will hire top talent to produce goods and services for a profit you should be owning stocks as a major portion of your investments even if you are retired or closer to retirement.
You should be thinking that this is crazy. No it is not here comes my next principle to clarify that.
3. You should not rely on the market value of the stocks for your investments but should rely on the income they can generate( dividends they pay) for your living expenses if you do not have other sources of income(like a job).
In the next post I will build on these principles and outline how to go about selecting the stocks as a major or core part of your portfolio.
