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Avoid making blunders by following this sensible investment strategy

by , 22 April 2015

Emotions play a big role in the way you invest. Listening to your emotions can result in you making erratic decisions that could cost your dear.

That's why it's vital to have a sensible investment strategy in place. You just need to stick to it.

So what should your sensible investment strategy include?

Read on to find out…

The merits of asset allocation and rebalancing

Asset allocation and rebalancing are two ways to help you make sensible investment decisions. And they merit inclusion in your investment strategy.

Let’s take a closer look at each of these…

The ins and outs of asset allocation

Asset allocation means dividing your portfolio into different assets classes you want to hold and then putting a percentage of your money into each.

Broadly speaking, there are five asset classes:

Asset class #1: Shares
Shares tend to perform differently to bonds so give you diversification benefits, John Stepek in Money Morning UK explains.

When it comes to selecting shares to invest in, you want to invest in the cheapest shares on offer across a different sectors and companies.

Asset class #2: Bonds
Bonds are generally lower risk than shares and many other investments you can make. And they tend to perform differently to shares, giving you the benefit of diversification. Plus they pay an income.

Asset class #3: Property
Property ranks somewhere between shares and bonds and is worth having as an asset class of its own.

Asset #4: Gold
Gold acts as portfolio insurance. You should hold between 5% and 10% of your cash in gold.

Asset #5: Cash
It’s sensible to hold some cash. You can use it to take advantage of any opportunities that arise and it lowers your overall risk.

Once you’ve decided on your asset allocation, regularly buy into your different assets. You want to do this gradually over time, so you’ll invest when prices are lower and higher. This lowers your overall buy-in price.

Where rebalancing comes in

Only once or twice a year, rebalance your portfolio. You need to see if the value of your investments in different assets has moved away from your original asset allocation.

If it has, you sell some of your higher priced assets and buy into lower priced assets. This helps you to sell high and buy low.

By including asset allocation and rebalancing in your investment strategy, you have a sensible plan to follow. And it will help prevent you from making impulsive decisions and panicking.

So there you have it. A sensible investment strategy to follow.

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Avoid making blunders by following this sensible investment strategy
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