How to Pick Your Investments Guide

Aug 26, 2024 | Advice, Investments, SJB Global

How to Pick Your Investments Guide

Aug 26, 2024 | Advice, Investments, SJB Global

Choosing investments is like building a house. You need a strong foundation, a detailed blueprint, and the right tools to create a structure that will stand the test of time. While understanding the basics of investing can be straightforward, mastering the nuances and making sound investment decisions takes careful planning and ongoing adjustments.

This guide will help you lay the groundwork, select the right materials, and construct a portfolio that supports your long-term financial goals.

Understanding Investment Basics
  • What is Investing? Investing involves allocating resources, usually money, with the expectation of generating an income or profit. The goal is to put your money to work in one or more types of investment vehicles with the hope of increasing its value over time.
  • Importance of Financial Goals Setting clear financial goals is crucial for successful investing. Whether you’re saving for retirement, a child’s education, or a major purchase, defining your objectives helps you choose the appropriate investment strategies and vehicles.
  • Risk and Return Relationship The risk-return relationship is a fundamental concept in investing. Higher potential returns usually come with higher risk. Understanding your own risk tolerance and the risks associated with different investments is essential for making informed decisions.
Setting Your Investment Timeline
  • Short-Term vs Long-Term Investments Short-term investments are those you plan to hold for less than a year, while long-term investments are held for several years. Long-term investing allows you to ride out market fluctuations and benefit from compounding.
  • Benefits of Long-Term Investing Long-term investing can yield higher returns due to the power of compounding. It also reduces the impact of market volatility, as short-term price fluctuations are less significant over a longer period.
  • Compounding Growth Compounding involves earning returns on both your original investment and the returns that those investments generate over time. This “snowball effect” can significantly boost the value of your portfolio.
Determining Your Risk Tolerance
  • What is Risk Tolerance? Risk tolerance refers to the degree of variability in investment returns that an individual is willing to withstand. It’s influenced by factors such as financial situation, investment goals, and psychological comfort with risk.
  • Factors Affecting Risk Tolerance Age, income, investment goals, and personal comfort with uncertainty all play a role in determining your risk tolerance. Younger investors with a longer time horizon can typically afford to take on more risk.
  • Assessing Your Own Risk Tolerance Evaluate your financial situation, investment goals, and personal comfort with risk to determine your risk tolerance. Tools like risk tolerance questionnaires can help quantify your risk preference.
Choosing Asset Classes
  • What are Asset Classes? Asset classes are groups of investments that have similar characteristics and behave similarly in the marketplace. Common asset classes include stocks, bonds, real estate, and cash.
  • Stocks vs Bonds Stocks represent ownership in a company and offer the potential for high returns, but come with higher risk. Bonds are debt instruments that provide regular interest payments and are generally considered safer than stocks.
  • Including Alternative Assets, Alternative assets include real estate, commodities, and private equity. These can offer diversification benefits and potentially higher returns but often come with higher risk and less liquidity.
Asset Allocation Strategies
  • Importance of Diversification Diversification involves spreading your investments across various asset classes to reduce risk. By diversifying, you can protect your portfolio from significant losses if one investment performs poorly.
  • Creating a Balanced Portfolio A balanced portfolio includes a mix of different asset classes tailored to your risk tolerance and investment goals. Regularly reviewing and adjusting your allocation ensures it remains aligned with your objectives.
  • Adjusting Allocation Over Time As you approach your financial goals or experience changes in your risk tolerance, it’s important to adjust your asset allocation. This might mean shifting from a growth-oriented portfolio to a more conservative one as you near retirement.
The Pareto Principle in Investing
  • What is the 80/20 Rule? The Pareto Principle, or the 80/20 rule, suggests that 80% of results come from 20% of efforts. In investing, this means focusing on the key factors that drive the majority of investment performance.
  • Applying the 80/20 Rule to Investments By concentrating on the most important aspects of investing, such as asset allocation and diversification, you can achieve significant results without getting bogged down in minor details.
  • Key Metrics to Focus On Key metrics to consider when picking investments include dividends, price-to-earnings (P/E) ratio, beta, earnings per share (EPS), and historical returns. These indicators can help you make informed investment decisions.
Stock-Picking Fundamentals
  • Dividends Dividends are payments made by a company to its shareholders, usually from profits. They provide a steady income stream and can indicate a company’s financial health.
  • Price-to-Earnings (P/E) Ratio The P/E ratio compares a company’s current share price to its earnings per share. It’s a commonly used metric for valuing stocks, with higher ratios indicating higher investor expectations.
  • Beta Beta measures a stock’s volatility relative to the market. A beta of 1 means the stock moves with the market, while a beta above or below 1 indicates higher or lower volatility, respectively.
  • Earnings Per Share (EPS) EPS represents the portion of a company’s profit allocated to each share of common stock. It’s a key indicator of a company’s profitability and is used to compare performance across companies.
  • Historical Returns Historical returns provide insight into a stock’s past performance. While not a guarantee of future results, they help investors understand potential risks and returns.
Technical vs Fundamental Analysis
  • Definitions Technical analysis involves studying past market data, primarily price and volume, to predict future price movements. Fundamental analysis focuses on evaluating a company’s financial health and growth potential based on financial statements and other qualitative factors.
  • Key Differences Technical analysis is more short-term and trading-oriented, relying on patterns and trends. Fundamental analysis is long-term and investment-focused, based on intrinsic value and economic factors.
  • Which to Use? For most individual investors, fundamental analysis is more practical, as it aligns with long-term investment strategies. Technical analysis requires more time, expertise, and comfort with data.
Understanding Dividends

Types of Dividends Dividends can be cash payments, additional shares of stock, or other forms of distribution. They are typically paid quarterly and can be reinvested to compound growth.

How Dividends Impact Investments Dividends provide a source of regular income and can significantly boost overall returns when reinvested. They also reflect a company’s profitability and stability.

Reinvesting Dividends Reinvesting dividends involves using them to purchase more shares, increasing your investment over time. This strategy leverages compounding to enhance long-term returns.

Evaluating the P/E Ratio
  • What is the P/E Ratio? The P/E ratio is the ratio of a company’s share price to its earnings per share. It provides a snapshot of what the market is willing to pay for a company’s earnings.
  • Interpreting Different P/E Ratios A high P/E ratio suggests high investor expectations for future growth, while a low P/E ratio may indicate undervaluation or lower growth prospects. Comparing P/E ratios within the same industry provides more context.
  • Industry-Specific P/E Ratios Different industries have varying average P/E ratios. For example, technology companies often have higher P/E ratios due to growth potential, while utility companies may have lower ratios reflecting stability.
Assessing Beta
  • What is Beta? Beta measures a stock’s sensitivity to market movements. A beta of 1 means the stock moves in line with the market, while a beta greater than 1 indicates higher volatility and a beta less than 1 indicates lower volatility.
  • Understanding Volatility Volatility reflects the degree of variation in a stock’s price. Higher volatility means higher risk but also the potential for higher returns. Lower volatility offers more stability but typically lower returns.
  • Using Beta in Investment Decisions Investors can use beta to balance their portfolios according to their risk tolerance. A mix of high and low beta stocks can provide growth opportunities while mitigating risk.
Earnings Per Share (EPS)
  • What is EPS? EPS is calculated as the company’s net income minus dividends on preferred stock, divided by the number of outstanding shares. It indicates how much money a company makes for each share of its stock.
  • Calculating EPS For example, if a company has a net income of $40 million and pays $4 million in dividends, with 20 million shares outstanding, the EPS is $1.80 ($36M / 20M).
  • EPS and Stock Value Higher EPS generally indicates better profitability, which can lead to higher stock prices. It’s a key metric for comparing the performance of different companies.
Analyzing Historical Returns
  • Why Historical Returns Matter Historical returns provide a benchmark for evaluating investment performance. They help investors understand how a stock has performed over time and set realistic expectations.
  • Long-Term Trends Analyzing long-term trends helps identify consistent performers and those that may be subject to cyclical fluctuations. This context is essential for making informed investment decisions.
  • Contextualizing Performance Past performance should be considered alongside other factors, such as market conditions and company developments, to provide a comprehensive view of potential future performance.
Benefits of Compounding
  • How Compounding Works Compounding involves earning returns on both your initial investment and the returns that investment generates. Over time, this process can lead to exponential growth.
  • Examples of Compounding For example, investing $10,000 at an annual return of 7% will grow to over $38,000 in 20 years through compounding. Starting early amplifies these effects.
  • Starting Early The earlier you start investing, the more time your investments have to compound. This can significantly enhance your long-term financial growth and stability.
Managing Investment Costs
  • Types of Investment Fees Common investment fees include brokerage fees, mutual fund expense ratios, and management fees. These costs can eat into your returns over time.
  • Impact of Fees on Returns Even small fees can have a significant impact. Over 20 years, a 1% annual fee on a $100,000 investment can reduce the portfolio’s value by $30,000.
  • Strategies to Reduce Costs Choose low-cost investment options, such as index funds and ETFs, and compare brokerage fees. Look for opportunities to minimize expenses without sacrificing performance.
The Role of Diversification
  • Benefits of Diversification Diversification reduces risk by spreading investments across different asset classes and sectors. This can protect your portfolio from significant losses in any one area.
  • Diversification Strategies Strategies include investing in a mix of stocks, bonds, and alternative assets, as well as diversifying within asset classes. Regularly rebalancing your portfolio ensures it stays aligned with your goals.
  • Avoiding Over-Diversification While diversification is important, over-diversifying can dilute returns. Focus on a balanced approach that provides adequate exposure without unnecessary complexity.
Traditional vs Alternative Assets
  • Definitions Traditional assets include stocks, bonds, and cash. Alternative assets encompass a wide range of investments, such as real estate, commodities, and private equity.
  • Examples Stocks and bonds are common traditional assets. Alternative assets can include real estate investment trusts (REITs), commodities like gold, and venture capital.
  • Pros and Cons Traditional assets offer liquidity and stability, while alternative assets can provide higher returns but often come with higher risk and less liquidity.
Balancing Stocks and Bonds
  • Historical Performance Historically, stocks have offered higher returns than bonds but come with greater volatility. Bonds provide stable income and lower risk.
  • Risk and Return Balance A balanced portfolio includes both stocks and bonds, tailored to your risk tolerance and financial goals. Adjust the mix over time to reflect changing circumstances.
  • Adjusting Over Time As you approach retirement, gradually shift from a stock-heavy portfolio to one with more bonds to reduce risk and protect your savings.
The 120 Rule for Asset Allocation
  • What is the 120 Rule? The 120 rule suggests subtracting your age from 120 to determine the percentage of your portfolio that should be in stocks, with the remainder in bonds.
  • Calculating Your Allocation For example, a 40-year-old would invest 80% in stocks and 20% in bonds. This approach adjusts your risk exposure as you age.
  • Adjusting with Age Reassess your allocation regularly to ensure it remains appropriate for your age, risk tolerance, and financial goals.
Investing in Index Funds
  • What are Index Funds? Index funds are mutual funds or ETFs that aim to replicate the performance of a specific market index, such as the S&P 500.
  • Benefits of Index Funds They offer broad market exposure, low costs, and consistent performance relative to the index. They are a popular choice for passive investors.
  • Choosing the Right Index Fund Consider factors such as the index tracked, expense ratio, and fund performance. Choose funds that align with your investment goals and risk tolerance.
Active vs Passive Investing
  • Definitions Active investing involves selecting individual stocks or actively managed funds to outperform the market. Passive investing involves tracking market indexes through index funds or ETFs.
  • Pros and Cons Active investing can potentially offer higher returns but requires more time, effort, and higher costs. Passive investing offers lower costs, less effort, and market-matching returns.
  • Which is Right for You? Passive investing suits those seeking simplicity and lower costs. Active investing is better for those who have the time and expertise to analyze and select investments.
Emotional Aspects of Investing
  • Managing Investment Emotions Investing can be emotional, especially during market fluctuations. Maintaining a long-term perspective and sticking to your plan helps manage these emotions.
  • Avoiding Common Pitfalls Common mistakes include panic selling, chasing trends, and overreacting to market news. Avoid these by staying focused on your long-term goals and investment strategy.
  • Sticking to Your Plan Having a clear investment plan and adhering to it, even during market volatility, is key to achieving long-term success.
Evaluating Investment Performance
  • Key Performance Indicators Important metrics include total return, risk-adjusted return, and benchmark comparisons. Regularly evaluate these to assess your portfolio’s performance.
  • Benchmarking Compare your portfolio’s performance to relevant benchmarks, such as market indexes, to gauge how well your investments are doing.
  • Reviewing Your Portfolio Regularly review and adjust your portfolio to ensure it remains aligned with your goals, risk tolerance, and market conditions.
Staying Informed
  • Following Market Trends Stay updated on market trends and economic developments. This helps you make informed decisions and anticipate potential impacts on your investments.
  • Using Financial News Leverage financial news and analysis from reputable sources to stay informed about market conditions and investment opportunities.
  • Impact of Economic Indicators Understand key economic indicators, such as GDP, inflation, and unemployment rates, and their impact on the financial markets and your investments.
Investment Mistakes to Avoid
  • Common Mistakes Avoid common investment mistakes, such as lack of diversification, emotional decision-making, and neglecting to review your portfolio regularly.
  • How to Avoid Them Educate yourself, stick to your investment plan, and seek professional advice when needed. Regularly review and adjust your portfolio to stay on track.
  • Learning from Experience Use past mistakes as learning opportunities. Reflecting on and understanding what went wrong can help you make better investment decisions in the future.
Planning for Retirement
  • Retirement Accounts Consider using retirement accounts like 401(k)s and IRAs, which offer tax advantages and are designed to help you save for retirement.
  • Investment Strategies for Retirement As you approach retirement, focus on preserving capital and generating income. Adjust your asset allocation to reflect a more conservative approach.
  • Adjusting Investments as You Age Gradually shift from growth-oriented investments to more conservative ones as you near retirement, ensuring your savings are protected and available when needed.


Investing can be a powerful way to grow your wealth over time, but it requires knowledge, strategy, and discipline. By understanding key concepts such as risk tolerance, asset allocation, and the importance of diversification, you can make informed decisions and build a robust investment portfolio. Remember to keep learning, stay informed, and seek professional advice when necessary to navigate the complexities of investing successfully.

If you’re looking for personalized guidance to optimize your investment strategy, SJB GLOBAL can help. Our team of experienced financial advisors provides tailored solutions to meet your unique financial goals.

Whether you’re a novice investor or looking to refine your portfolio, SJB GLOBAL offers the expertise and resources you need to succeed. Contact us to learn how we can help you achieve your investment objectives and secure your financial future.

 

Call-to-Action Box

Schedule an Obligation-free Call With an Adviser

Book a Consultation

By scheduling an appointment with an adviser they will reach out to you at your requested time. Personal advice, whenever it suits you.

This communication is for informational purposes only based on our understanding of current legislation and practices which are subject to change and are not intended to constitute, and should not be construed as, investment advice, investment recommendations or investment research. You should seek advice from a professional adviser before embarking on any financial planning activity. Whilst every effort has been made to ensure the information contained in this communication is correct, we are not responsible for any errors or omissions.

 

Free Guides

To help expatriates understand often complex financial products and services, SJB Global has created a series of detailed tax and residency guides.

Download Guides