Leonardo Da Vinci was right - “Simplicity is the ultimate sophistication.”
In investing, this can be difficult since it can feel incredibly complex.
This is because there are thousands of stocks and stock markets that always seem volatile and uncertain. Even tougher is deciding when to sell a stock or fund to lock in gains or limit losses.
There are ample books and articles out there regarding the right rules such as the need for discipline, patience, and research.
All this is good advice except for two things, which the following simple rules to build wealth hope to address.
First, what has worked in the past may not work in the future because the world and financial markets are constantly changing.
Second, investors are human and therefore sometimes irrational and prone to act on emotions. This leads to making the wrong moves like buying at the top and selling at the bottom.
[text_ad]
There is also merit in legendary global investor Sir John Templeton’s sage advice:
“Diversify. In stocks and bonds, as in much else, there is safety in numbers.”
Except that diversification, taken to the extreme, is counterproductive.
It helps to have a strategy.
5 Simple Rules to Build Wealth
1. Begin with a Core Portfolio
For your core portfolio, I would go with low-cost, tax-efficient exchange-traded funds (ETFs) as building blocks. As I describe in my book, “Think Global, Grow Rich,” this core portfolio has capital preservation as its primary goal and capital appreciation as a secondary goal.
I suggest about 10-12 ETFs to build a diversified portfolio with allocations to fixed income, broad U.S. equity markets, exposure to high-quality international markets, income and dividend ETFs, gold, and even some exposure to alternative and real assets.
But if you want to go ultra simple with just one ETF, consider the Vanguard Total Stock Market Index (VTI). With an annual fee of just 0.03% and assets of over $1.3 trillion, this ETF is a basket of over 4,000 stocks.
While it’s market-cap-weighted toward the largest companies in the nation, it also gives you exposure to mid-cap and small-cap names that are “under the radar” for most investors.
2. Supplement Your Core Portfolio with a Portfolio of Stocks
On top of your ETFs could be a portfolio of individual stocks.
It is a personal choice what proportion of your total portfolio and how many stocks should be in your stock portfolio, but be careful not to have too many or too few because both come with drawbacks.
I suggest around twenty stocks that include dominating blue chips and more aggressive disruptive stocks. This is where the Cabot Explorer and other Cabot Wealth products can help you make the best choices.
3. Take Profits from Time to Time
Finally, don’t forget to take some profits from time to time. We have all been there. Nothing is more painful than picking a great stock and watching it peak and then fall back to earth. Don’t ride the rollercoaster with your investments.
If you are fortunate enough to have a stock or fund double in value, sell some of your position to turn paper profits into real profits.
4. Protect Yourself from Losses
Also, whenever you buy an aggressive stock, it’s smart to put in place a 20% trailing stop loss. This means you have an automatic exit if your stock falls 20% from its high.
This is important because it takes emotion out of the equation and protects your hard-earned gains or limits your losses so you can fight another day.
5. Get Help (If You Need It)
It is also a good idea to get some help in following and picking stocks.
Join the Cabot Explorer today to learn more about getting the right ETFs and stocks into your portfolio.
[author_ad]