Managing Private Investments 101

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The fundamentals of private investing are straightforward. However, simple doesn’t equate to easy. Managing your investments can be a lot of work and more than anything else, it requires knowledge and skill.

How can you successfully manage your investments? With all the risks in investing, what does it take to identify the best moves and minimize losses? There are major methods you can employ, some of which we would be considering below.


1. Build a Margin of Safety

What can be considered perhaps the most crucial step in protecting your portfolio is to ensure to have a margin of safety built into your investments. Two ways to incorporate this principle into your investment selection process includes:

First, be conservative in your valuation assumptions. Making conservative value assumptions would help you avoid overpaying for businesses that wouldn’t have same impressive growth rates in the future.

The second way is ensure to carefully select what assets to purchase and what firms to deal with. It’s crucial to make sure you are getting a fair deal.

2. Invest in Assets You Understand

Managing investments becomes much easier when you invest in business areas you have, at least, basic knowledge about. That way, you as an investor can make better informed forecasts.

Predicting future trends is more difficult to do with firms whose operations you have little or limited understanding of. It’s important to admit your shortcomings in business areas to avoid making major mistakes.

3. Measure Operating Performance, Not Stock Price

Often, investors estimate the validation and measurement of an asset by its current market price. In the long run, that price simply follows the underlying performance of the cash generated by the asset. It is always a better choice to acquire assets that accumulate cash over time.

In this situation, immediate appreciation or depreciation doesn’t matter because substantial long-term growth rate is what is essential.
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4. Minimize Costs, Expenses, and Fees

Because it isn’t apparent at first glance, investors often think it is more beneficial to frequently trade to increase profit. The opposite is true.

Frequent activity is often the enemy of long-term superior results. When you are constantly trading, you increase the amount of commissions, fees, ask-bid spreads, and taxes.

Over a long time, this adds up to create staggering results especially when combined with understanding the time value of money.


5. Be Rational About Price

If an investor has done their homework and researched properly before making an investment, a price decline shouldn’t be a cause for alarm. It is best to view this as a chance to buy more of an asset that would provide long term profit. This is different from what most investors think because they often irrationally chase stocks that rise rapidly in price.

6. Allocate Capital by Opportunity Cost

Invest based on opportunity cost. This means that you should consider and evaluate your alternatives before putting your money in. Consider every potential use of cash and compare it to the one that offers you the highest risk-adjusted return. The decisions you make should always be made based on your expected opportunity cost.

In the same vein, include the concept of risk-adjusted returns. This refers to looking into other factors such as the potential downsides and probabilities.

Often, there isn’t enough disposable income to maximize all of the retirement contribution limits. This makes opportunity cost relevant to investors because they have to decide where to invest their money first.


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