3 Simple Steps to Become a Selective Investor

You do not have to invest in everything

Photo by Austin Distel on Unsplash

In the United States, there are thousands of publicly traded companies. Even with classification such as the Global Industry Classification Standard (GICS), it is impossible to know about every single company.

When it comes to understanding the financial markets, it is great to know the different kinds of companies across multiple sectors. When it comes to investing, you need to boil down your focus so that you are investing in companies you will be willing to hold for an extended period, such as 5 to 10 years.

It is important to build a diverse portfolio over time, but you do not want to spread yourself thin. To become a selective investor, you need to narrow down your selection, understand your portfolio allocation and risks, and avoid over following the news.

Note: I am not a financial advisor. I do not know your financial situation. I am sharing this information for educational purposes.

1. Narrow down Your Selection

Having a large watchlist of different companies from different sectors is fine. It allows you to capture quick information on specific companies you are interested in staying up to date on. The issue is that you believe that you should invest in a large majority of the companies on your watchlist. You should not.

When it comes to investing, you need to narrow down your selection to the choices that will provide you with the best returns in the long run. All the companies in your watchlist can be good, but are they all the best choice for you?

In being selective, you are taking the stress out of investing for yourself. If you have trouble being selective, consider going the route of investing in an index fund or ETF. For example, if you desire to hold over 10 different information technology stocks, you should consider looking to invest in an index fund such as the Vanguard Information Technology Index Fund (VITAX) or an ETF such as the Vanguard Information Technology ETF (VGT).

2. Understand Your Portfolio Allocation and Risks

Understanding the allocation of your holdings and the risks you are taking regarding your holdings is important. Being diversified is great, but there is a balance that is necessary when it comes to diversifying your portfolio and maintaining being selective.

For example, if the largest holding in your portfolio makes up less than 5% of your portfolio, you are likely spreading yourself thin. That is risky due to you ineffectively trying to replicate an index fund or ETF with your holdings. It would be more efficient for you to invest in an index fund or ETF.

On the flip side, if the largest holding in your portfolio makes up over 25% of your portfolio, you are overexposing yourself to the risks of that one company. You are making yourself vulnerable to the unsystematic risks of that company, such as regulatory issues, management changes, and labor disputes.

Balance is important when it comes to your portfolio allocation and risks. It is also important when it comes to being selective. You do not want to pick every company to invest in. You also do not want to be overly selective and put yourself in risky situations that can cost you money.

3. Avoid over Following the News

Reading, watching, and listening to the news to stay up to date on the financial markets is important, to an extent. You want to be knowledgeable of our current financial landscape, but you do not want to let the news sway you in wanting to invest in companies you would have never considered.

For example, if your favorite news source repeatedly mentions Companies A through E coming close to a Covid-19 vaccine, that does not mean it is time for you to consider investing in 5 different companies.

The news should just be used for informational purposes. When it comes to making investment decisions, the decisions should be because of the research and due diligence you have conducted. Every company mentioned in the news is not worth your time.

Being a selective investor can be tough to get used to, but it will be a major benefit to you in the long run. When you are selective, you are more likely to position yourself for the best investments possible based on the research and due diligence you have done. You want to be able to set yourself up for long-term financial success. Having long-term financial success involves making difficult decisions sometimes, but those decisions are what keep you going on the right path.

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3 Simple Steps to Become a Selective Investor was originally published in The Capital on Medium, where people are continuing the conversation by highlighting and responding to this story.

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