One of the most important things you can do for your investment portfolio in this economy, is to remember the fundamentals. The basic building blocks of a solid portfolio that will stand the test of time are the fundamentals of what you include. The big picture is essential as you choose the investments that will get you through the tough times, and recover when the economy is doing well.
What are the Fundamentals of a Good Investment?
When deciding which investments to include in your portfolio, you want to make sure that you get back to the basics. Rather than using fancy analyses, and following the latest trends, look at the building blocks that make up the investment. Look at the big picture, and recognize the potential of each investment.
Some of the fundamentals that you can consider as you evaluate a stock investment for your portfolio include:
- P/E ratio
- Profit margin
- Balance sheet
- Business model
- Competitive place in the industry or sector
- Company management (and scandals)
- Innovative potential
If you are looking at other asset classes, there are ways to consider the big picture as well. When you look at commodities, you should understand how the global supply chain affects prices, including weather patterns and political upheavals. Before you add an investment to your portfolio, it makes sense to understand the fundamentals that drive the investment. From bonds to real estate to currencies, there are basic building blocks that point to the possibility of a solid performance.
In the end, looking at the fundamentals is about value. What is the long-term potential? What makes the investment valuable? And what will carry the investment through difficult economic times? An investment — no matter the asset class — with solid fundamentals is almost always a good value. It may not be glamorous, and you might not see huge returns, but you will see steady performance. Plus, when everything tanks and times are tough, a fundamentally sound investment will make it through with fewer losses, and be poised to take advantage of the recovery that often follows.
When you invest with an eye to the fundamentals, it’s important that you understand that you are taking a long-term view. During a market crash, even the most solid of investments will head lower. But it’s important to understand the difference between an investment that is heading lower because the whole market is going down, and an investment that is in real, serious trouble. An investment with strong fundamentals will head lower with the rest of the market, but its’ solid basic underpinnings will support it to some degree — and help it emerge ready to grow at a moderate pace.
Yes, you want to add exciting investments to your portfolio; however, you don’t want to stake your future on the “hot” pick of the week. What you really want is staying power. Build a portfolio with an eye for the long-term, and when the economy goes bad, you will have peace of mind, knowing that your investments are (mostly) fundamentally sound.