Read This if You Want to Be a Successful Investor

By George Leong for Investment Contrarians | Oct 3, 2012

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The NASDAQ is up 20% this year, as stocks continue to edge higher to multi-year highs. Blue chips are at their highest level since December 2007. Small-cap stocks are hot, up a sizzling 3.1% in September following a 3.3% advance in August. The S&P 500 is at a five-year high, and while the index has held above 1,400, the possibility of the multiple top formation concerns me, based on my technical analysis.

Now is the time to make sure that your portfolio is not overly vulnerable to a stock market correction if one were to surface. Of course, you should always take some profits off the table, a key for stock market success.

In my view, a critical investment strategy includes asset allocation, diversification, and the addition of small-cap stocks to maximize the expected return of your portfolio and increase your stock market success.

The concept of asset allocation should be a key part of any prudent investment strategy, as it will increase your stock market success.

Asset allocation refers to the asset mix of your portfolio, which is divided into the three major asset classes—cash, fixed income, and equities. Too much equities and you are vulnerable to selling. Too much cash and you could miss out of a stock market rally.

As the macro and micro factors change, you should rebalance your asset mix and modify your investment strategy, thereby increasing your stock market success.

A great investment strategy for stock market success is the use of Put options as a hedge against weakness.

The more risk assumed, the higher the expected rate of return; albeit, this is not always the case in reality. For instance, investing in penny stocks and micro-cap stocks adds growth potential to your total portfolio return, but it also increases the risk.

A general rule for asset allocation is that the weighting of the fixed income portion as a percentage of your total portfolio should approximate your age.

Let’s say you are 25 years old. Under this scenario, a prudent investment strategy would allocate 25% of your assets in fixed income and up to 75% in equities. And on the other end of the spectrum, a 50-year-old entering the final phase of his or her working life should have a conservative 50% weighting in fixed income securities. And of course, a person at the retirement age of 65 should have a minimum of 65% in fixed income.

Keep in mind that this rule should only be used as a guideline; it is not meant to be conclusive, but it will help to increase your stock market success.

Prudent asset allocation attempts to achieve the highest rate of return given the risk. The route to stock market success is to understand how to create an appropriate blend of equity, fixed income, and cash.

To determine your risk profile, you should first understand your investment personality.

Investors range from the ultra-conservative investor, who wants to sleep at night, to the highly aggressive speculator, who thinks of the stock market as a roll of the dice.

It is critical for stock market success to stay within your risk boundaries if you are conservative. For example, if you tend to get jittery when the stock market gyrates, focus on blue chips and big-cap stocks.

Asset allocation is often dependent on your age; but in reality, understanding each person’s risk profile is also very important for stock market success. The only rule that generally applies is that the older you get, the less exposure to equities you should have; you don’t want to risk your life savings for a hot tip from your barber, which would not be good for stock market success.

Tags: big-cap stocks, investment strategy, small-cap stocks, stock market, stock market rally, stock market success, technical analysis