SAN JOSE, California,, June 8, 2021 / PRNewswire / – There never seems to be a lack of polished financial “gurus” who claim to have just discovered a reliable method of investing that guarantees high risk-free returns. But if someone tries to get inside yours pocketing by giving these kinds of promises, you’d better go the other way.
It is true that there is no investment without risk. And while the mechanics and tools you use to invest can change over time, most of the basic principles of how to succeed in investing will never change.
So, if you are looking for a stock selection list, this is not the article for you. But you’ve come to the right place if you want strategic advice on how to develop your overall investment plan. Here are five proven investment tips that can help you achieve your goals.
For more education on loans and credits visit the myFICO blog at https://www.myfico.com/credit-education/blog
1. Start investing as soon as you can
People often worry that the stock market could collapse as soon as they start investing (especially if it grows for a longer period of time as it was during 2020 and 2021). And this concern can keep them on the margins to invest.
But studies show that market time is really what you want to target as an investor, not the perfect time. For example, Capital Group found even if you invested $ 10,000 in the S&P 500 on the worst (highest) day of each year from 1998 to 2018, you would still more than double your money over a period of 20 years.
However, that study assumed that you avoided the urge to withdraw money during a market crash. The longer your money stays invested, the greater the chances of a positive return. The Study Capital Group found that the market fell about 27% of the time over one-year ranges and 17% of the time over three-year periods.
But as you extend the time frame, the likelihood of a positive return only increases. The Study Capital Group found that you have an 84% chance of making money on the stock market if you keep it invested for at least five years. And over a period of 10 years, the chances of success jump up to 94%.
These data show that this is, as a general rule always good time to invest. But maybe it’s not the right time for that you. For example, if you’re still trying to repay a high-interest credit card debt or build your own emergency fund, you may want to achieve those financial goals before you begin your investment journey.
Related: Debt payment versus investment and savings. What is the right choice?
2. Decide if you want help (and how much)
Some people feel comfortable opening an account with a stockbroker and choosing all their investments on their own. And that’s great.
But others would like a little help, and that’s fine. There are various ways you can get professional investment help.
If you’re just looking for someone to help you put together your investment plan, you may want to schedule a one-time meeting with a financial advisor who only pays a fee. Or, if you want a completely hands-on experience, you can pay the advisor a permanent investment management fee for you.
Robo-advisors, who use computer algorithms to manage investments, have also gained popularity as cheaper wealth management options. Many leading robo-advisors offer automatic rebalancing and tax collection, while charging a fraction of what a human advisor would charge (often starting at around 0.25%).
3. Diversify your investments
Diversification expand your investment so you don’t have “all your eggs in one basket”. Building a properly diversified portfolio can reduce both risk and instability.
It is important to diversify both across the street asset class and inside them. Diversification between asset classes means that your portfolio goes beyond just investing in U.S. stocks and includes other assets such as bonds, international stocks, cash, real estate, and other alternative investments.
But even within an asset class, like U.S. stocks, you should watch out for the level of diversification. For example, owning shares of Southwest Airlines, Carnival and Hilton hotels is more diverse than just owning one of these companies. But if the tourism industry, as a whole, hits (as it did during the pandemic), each of these stocks may have a weaker impact.
For this reason, it is important to ensure that various industry sectors are represented in your portfolio. The few most common sectors include technology, healthcare, industry, energy, consumer products and more.
It is easy to diversify your shares in stocks using funds (mutual funds or ETFs). Certain funds are actively managed, while others track market indices such as the S&P 500. Some brokers also allow clients to buy partial stocks, making it easier to invest in many stocks or ETFs with minimal capital.
4. Know your investment goals and deadlines
When will you need access to funds from your investments? And what is the target value of your portfolio at that time? These are important questions to ask and answer at the beginning of your investment journey.
Knowing your investment goals can prevent you from panicking at a time of high volatility. And it could encourage you to increase your contributions if you fall behind.
As you approach your target deadline, you may also want to gradually move to a more conservative asset allocation (i.e., more bonds and fewer stocks). A good rule of thumb is to subtract the age of 110 to 120 to calculate how much of your portfolio should be in stock.
If you have decided to subtract the age of 110, you would like to have 90% of your portfolio in stocks and 10% in bonds at the age of 20 (110-20 = 90). But by age 60, you’d like to have a 50/50 stock-bond ratio (110-60 = 50).
If you don’t want to make these adjustments manually, you can invest in a target date mutual fund that will become more conservative as your target date gets closer. Robo-advisors will also automatically adjust your asset allocation over the life of your target.
Related: 6 Ways to Prepare Your Finances for a Recession
5. Reduce taxes and fees
If you are investing in retirement, it is important to take advantage of all the tax-protected accounts available to you. If you have access to a 401 (k) plan, this could be a great place to start (especially if your employer offers the right contribution). And if you’re self-employed, you might want to consider opening a SEP or SIMPLE IRA or Solo 401 (k).
If none of these employment-based plans are available to you, you can still open an individual IRA (traditional or Roth). With a traditional IRA, taxes on your contributions are deferred until the money is withdrawn. In the meantime, with the Roth IRA, you are now paying tax on your money so that you can withdraw your tax-free retirement.
Do you think your annual retirement income will be higher than it is today? If this is the case, you may be better off choosing a Roth IRA and paying income tax now. But if you suspect your income will be lower in retirement, deferring taxes by contributing to a traditional IRA might be a better choice.
Related: Traditional IRA Vs. Roth IRA: What is right for you?
In addition to reducing the tax withdrawal of your portfolio, you would also like to pay attention to the underlying cost of your investments. You can check the cost ratio of a mutual fund or ETF to see how much of its assets are used to cover costs. Note that passively managed index funds often have lower cost ratios than actively managed funds.
The bottom line
No one knows how a particular investment will be made tomorrow, next month or next year. But we to do know that the market as a whole grows over time and that a well-diversified portfolio is less risky than one invested in just one or two assets.
We also know that if two investors earn the same rate of return on their investment, the one who pays less taxes and fees will come out.
Are these earthquake or complicated ideas? No. But if you let them guide your investment decisions, they are more likely to achieve success in the long run.
Continue reading: A short guide to saving versus investing
About myFICO
myFICO makes it easy to understand your credit with FICO® Results, credit reports and alerts from all 3 offices. myFICO is the FICO consumer department – get your FICO results from the people who make the FICO results. For more information visit https://www.myfico.com.
SOURCE myFICO
