The 2009 World Wealth Report from Capgemini and Merrill Lynch, a survey of high net wealth speculators around the globe that have US$1 million of net financial wealth excluding their primary residence, outlines where these folks invest their money.
Typically the 10,000,000 folk worldwide that fit this definition of having ‘high net wealth’, have 29% of their capital invested in shares, 31% in bonds, 17% in notes, 18% in real-estate and 6% in options like hedge funds, commodities and personal equity. If the planet’s wealthiest folk take such a diversified approach maybe the remainder of us should also consider it.
Diversification also is applicable to share portfolios. Own a variety of corporations, but don’t over-diversify, or as Peter Lynch the great Fidelity fund executive, calls it de-worse-ification. Having mentioned that Lynch used to hold over seven hundred corporations in his fund, but advocates private speculators hold maybe 20-40 corporations.
Stressing top quality shares is a technique that continues to sound correct. It is commonplace to see folk new to shares to head directly for the hopeful end of the market to buy little firms or shares trading at a few pennies.
While not quite as exotic as this, top quality corporations, like bigger, blue chip corporations that have experienced management and have a past history of delivering growing profits and dividends, do have a tendency to outperform long shots.
When times are good and the market is rising, quality does have a tendency to lag, but when the unavoidable troublesome times roll around, quality shines and long shots can regularly fall into deep black holes.
Selling is something financiers should be prepared to do, but only reluctantly. Warren Buffett has traditionally announced his preferred holding period for shares is for ever and ever. What this actually means is that long term speculators should sit thru times of short term share price weakness or volatility if they’re ok with the fundamental basics of the business they own.
But this does not imply share financiers can ignore bad news. If a company seems to be facing troublesome long term issues, be ready to sell.
Include some smaller firms. While blue chips should make up the center of a share portfolio, leave a little bit of room for some engaging tiny corporations. Though higher-risk, they offer more expansion potential. It can be smart to go looking for smaller corporations which have the features of blue chips in each way apart from size.
Buy integrity. As respected US investor Philip Fisher has expounded “there are too many decisions out there to trouble with firms that are not run by honest, tenacious folks”.
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