Volatility in Accumulation Versus Distribution
For the most part, investment cycles mainly comprise two phases: distribution and accumulation. During the accumulation phase, volatility in the portfolio is uncomfortable but not consequential. This means that if you don’t react adversely to market lows and allow the portfolio to compound over time, you’ll end up with the same result as if you had a lower volatility portfolio with the same growth rate. On the other hand, during distribution, the volatility of a portfolio is consequential and not primarily because of your feelings. Ask yourself this question, how long will your portfolio last if you’re constantly pulling money during market lows? Not long, right? Why? Because you’ll end up selling more shares to raise more capital as compared to when the markets are high.
All in all, whether you’re pulling shares during the accumulation or distribution phase, emotions are the one thing you need to be most careful about. Every time you think about making critical investment decisions, factor in the emotional response aspect of it all. Second, in both accumulation and distribution, volatility plays a part because average rates of return can be misleading sometimes. Remember, percentages rarely tell the whole story. So, always have a look at the compound average growth before making any rash decisions.
Risk Tolerance and Company Specific Risk
If you’re completely honest with yourself, every investment opportunity has some degree of risk attached to it. The earning and growth potential is predominantly based on the future, and therefore the unknown aspect comes into play. So, how much risk are you willing to take? Risk tolerance is one of the most crucial concepts you need to grasp before making investment decisions. This is because risk tolerance helps determine the amount of risk that can be taken when building your portfolio. So, if you’re willing to accept some risks in your portfolio, it would be best if you understood the different types of risks present in any portfolio. There are industry-specific risks, economic risks, monetary policy risks, to mention but a few. Therefore, always limit the individual positions in your portfolio to at least mitigate the risks associated with company-specific risks.
Diversification Versus Healthy growth
What makes diversification such a controversial topic in the world of investing? Before we go into that, let’s first explain what diversification really is. Diversification is a risk-reducing strategy where investors spread investments across various financial instruments. The main agenda here is to maximize returns by investing in uncorrelated market opportunities. However, diversification does not guarantee against loss but is critical to achieving long-range financial goals while minimizing risks.
Going back to the earlier asked question, the one thing that might explain why diversification is such a controversial question is growth. Think about it this way; you’ve invested in a stock that boasts some decent returns in the recent past. Would you be willing to trade that stock in favor of diversification? Mind you, we’re not against consistency. We just value potential a little bit more. Although leaving a relatively lucrative stock would be a tough pill to swallow, there is more to be gained by investing in stocks that show potential. So, take advantage of the current hot stocks and make sure you allocate a portion of your portfolio to stocks that show promise in the days to come.
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