The most successful investors don’t speculate or gamble. They invest based on knowledge, experience and data — and end up with high long-term returns as a result.
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So how can you earn similar “asymmetric returns,” minimizing risk while maximizing returns?
Several wealthy investors weighed in to share how they approach picking investments and how you can follow in their footsteps.
Understand What You’re Investing In
If you don’t understand the investment or why you’re making it, you’re effectively gambling. The wealthy make it a habit to understand where they are putting their money.
“You should understand what you are investing in, meaning stocks, bonds, ETFs, mutual funds and so on,” explained Dr. Jay Zigmont, PhD and certified financial planner (CFP) who founded Childfree Wealth. “When you buy a stock you are buying a very small part of each company. With bonds, you are effectively making a loan to a company or the federal government and getting back interest. Mutual funds and ETFs are bundles of stocks, bonds or both.
“Each investment you make comes with risks and rewards. There is a balance between taking on risk and the potential return. Often riskier investments may have a higher potential return, but not always. You need to make sure your potential investment returns meet your goals. If you have aggressive goals you may need to take more risk to get there.
“For our clients, we tend to follow a long-term, passive investment strategy that uses three ETFs as the core investments. The three ETFs include investing in U.S. stocks, international stocks and bonds. This simple, passive investing strategy works for most.”
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Model the Most Successful Investors
Interested in going beyond broad ETFs and want to try and beat the market by picking individual stocks? Start by simply watching what investors with a strong track record do.
“An overlooked method of selecting investments is to mirror the investments of iconic investors. One could learn a great deal and perform very well from tracking and mirroring great investors like Warren Buffett,” said Dr. Robert Johnson, chartered financial analyst (CFA) and professor of finance at Creighton University.
“Many pundits have noted that reading Mr. Buffett’s Berkshire Hathaway Annual reports — as well as watching the Q&A from the Berkshire Hathaway Annual Meeting — is akin to attending a master class in investing. Many attempt to glean the principles followed by Buffett and apply them to their own investment decision-making. A simpler way to do that is to simply invest in what Buffett invests in. Berkshire and other institutional holders of U.S. stocks detail their holdings quarterly in 13-F filings with the Securities and Exchange Commission (SEC). These 13-F filings by Berkshire are widely followed by the media. This gives one insight as to changes being made in the Berkshire marketable securities portfolio.”
Balance Fundamentals With Momentum
As a general rule, long-term investors don’t get caught in the weeds of short- or medium-term momentum. However, some more advanced investors include momentum alongside long-term fundamentals to find the best investments.
“The investment approach I use is akin to a three-legged stool,” said Anthony Termini, investment advisor and contributor at Annuity.org. “It’s sturdy and durable only when all three legs are in place. The legs are solid fundamentals, earnings momentum and timing momentum.
“Solid fundamentals include a strong balance sheet, generous profit margins and plenty of free cash flow. Lots of companies check these boxes but still fail to create the earnings momentum that can move their stock prices higher.
“The long-term trajectory of stock price is directly correlated to earnings momentum. A company that creates new products or services stands a very good chance of accelerating sales and earnings growth. This defines earnings momentum.
“I look for companies that continually have some new offerings in the early stages of the product life cycle. However, before I buy a stock with solid earnings momentum, I want to make sure that it also has solid timing momentum. I want to make sure the stock is not in a downtrend.
“Timing momentum means that the short-term uptrend is validated by a number of moving averages that confirm its durability. A resource I use to put all of these pieces together is EPSMomentum.com.”
Consider Alternatives — With Caution
Most investors stick with stocks and bonds, perhaps sprinkled with the occasional REIT. However, many wealthy investors look for asymmetric returns among alternative investments such as private equity real estate or energy.
“We often advise our clients looking to build generational wealth to explore alternative investments, such as oil and gas minerals or direct drilling opportunities,” said Jace Graham, CEO of Rising Phoenix Capital.
“For example, our oil and gas mineral funds have generated strong returns with an average annual rate of return of 16% over the last six years. These investments offer a source of passive monthly income through royalty payments, which are not tied to operational costs or risks typical of other investments. This aspect of oil and gas investments can add a layer of stability and predictable income to your portfolio, for risk management and income generation — especially useful in today’s volatile economic climate.”
Use caution however when you veer off the well-trodden path. Remember the first point: You should understand an investment before parking any money in it.
Get Expert Help
When in doubt, seek out an expert to offer personalized advice.
“Building wealth is a marathon not a sprint, and it requires a plan,” Johnson said. “People should work with a credentialed financial advisor who is a fiduciary, preferably a CFA charterholder or CFP certificant.
“When we get sick we go to the doctor. When we get into legal trouble we hire a lawyer. Yet, somehow people believe that they should be able to navigate the increasingly perilous financial waters without professional help.
“It starts with determining goals and objectives, as you cannot arrive at a destination without first identifying it.”
Start with your end goals in mind, and invest accordingly.
When you’re young, you can afford to take greater risks while pursuing higher returns. The closer you get to retirement, conventional wisdom urges you to scale back the risk in favor of protecting what you’ve built.
If you don’t feel ready to hire a human financial advisor, consider starting with a free robo-advisor to help you get started with investing. It takes skill and knowledge to consistently beat the market by picking individual investments, so proceed with caution — and a lot of education.
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This article originally appeared on GOBankingRates.com: 5 Ways To Pick Your Next Investment, According to Experts
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
