5 Tips to Successful Investing

Nov 10, 2016 by

5 Tips to Successful Investing

Investing can be a complicated. Here are easy 5 tips to keep in mind when you are managing your investments.

Start Early

Perhaps the most important factor in investing is time. If you look at the recorded history of the stock market, you will see that the market increases approximately 7 to 10% each year. Each year you are not in the stock market, you are costing yourself potentially thousands of dollars! Let’s consider the example of 2 investors, Jasmine and Camille, who invest for 20 years.  If Jasmine saves $100 a month for 20 years, she will have approximately $52,000.  If Camille, on the other hand, gets a late start at investing (say 10 years) but wants to save as much as Jasmine, she will have to save an additional $200 each month for a total of $300!  This is a huge difference! Time is key when it comes to investing.

 

Keep Costs Low

The greatest predictor of investment performance is the fee you pay.  According to Vanguard, investments with lower costs tend to out perform those with higher costs.  Investment fees may sound small, but can add up over the course of your investment.  For example a fee of 1% would generate nearly $66,000 in fees in a portfolio initially at $100,000 over 20 years

 

Diversify

Keep your investments diversified.  We all know why we don’t keep all of our eggs in one basket.  The same reasoning goes into our investments.  Not only do we want to diversify our investments between stocks and bonds, but there are other options such as domestic funds, international funds, commodities, emerging markets, etc.  It is important to take a look at your portfolio to make sure you are exposed do a variety of markets.

 

Stay the Course

There will be times when the stock market may either be extremely volatile, or going down dramatically. Don’t sell!  Natural human behavior tells us that we should exit the market when things are going poorly, but this is the opposite of what you want to do.  Since we know the stock market continues to increase over the years, any down turn in the market is an opportunity to essentially purchase the stocks on sale.  The opposite is also true.  Just because the market increases sharply one day, it does not mean you should immediately throw money in the market.  It’s important for you to pick you asset allocation based on your desired growth and risk tolerance, then make sure to stick to the plan despite what may be going on in the market.

 

Re-balance Portfolio

A key part of staying the course with your investments is to re-balance.  Re-balancing your portfolio is essentially the process of selling high and buying low.  Let’s consider the example of an investor with a portfolio of 60% stocks and 40% bonds.  If stocks do very well in a year, the value of the stock portion of the portfolio will increase while the bond portion decreases. The theoretical allocation could have changed to 70% stocks and 30% bonds at the end of the year.  If you do not re-balance your portfolio, you are now investing with more risk than you initially planned.  This is bad because a poor performing stock market will decrease your overall portfolio more than you may be comfortable with, which may cause you to sell at the worst possible time.

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