There’s a proverb that reads: “The best time to invest your money is 20 years ago; the next best time is now.”
In other words, time is a great advantage for investors seeking to grow their assets. And for those who have not started investing yet, there’s no better time to start than today – because the sooner you start, the greater the chance to accumulate wealth.
For new investors, it’s prudent to familiarize yourself with some investing basics before getting started in order to maximize your experience and avoid unnecessary risk.1
Following are a few tips and terms to help you get started on your investment journey:
Determine Your Goals
Before investing, it’s important to understand why you’re investing. Whether you’re looking to fund a child’s college education, your dream home, or simply a comfortable retirement, a clear understanding of your goals can help shape your investment strategy to help ensure your goals come to fruition. Staying focused on your long-term goals can also help you avoid common mistakes such as reacting emotionally or irrationally in periods of heightened volatility.
Set a Saving Rate
Consider your current income and expenses and determine how much each month you can set aside to save and invest. If you have an investment plan at work, take advantage of it by arranging to have regular contributions deducted from your paycheck. An employee investment plan is an excellent investment tool, especially if your employer makes a matching contribution on your behalf. Even without an employee investment plan, investors can benefit from making regular investments over time – known as dollar cost averaging – which helps you invest in assets at various price points as the markets move up and down.
Determine Your Investment Horizon
With clearly defined goals, you’ll have a better understanding of your investment horizon and when your goals may be realistically attainable. This will impact how aggressive or conservative your investing approach and strategy will be. For younger investors with a longer time horizon, taking more risk to generate higher returns may be warranted because you have the time to recover from market downturns. Investors nearing retirement or those investing for income will likely take a more conservative approach to protect their assets from potential market drawdowns.
Determine Your Risk Tolerance
It comes down to a simple question: how much downside in an investment are you able to endure? If your stocks are down 20%, will you want to sell? Will it keep you up at night? Understanding your tolerance for risk will help you determine if you’re a conservative, moderate, or aggressive investor and help you build investment portfolios consistent with that risk tolerance. Your goal is to stay invested across market cycles to let time work for you.
Diversify Your Portfolio
You never want all your eggs in one basket. Diversification is the practice of allocating your investments across a variety of assets to limit downside risk. This approach can drive more consistent returns over time and enables you to benefit from changing market conditions and sentiment. A diverse portfolio often contains a balanced blend of assets across the risk spectrum.
Find the Best Investments for You
There are a lot of different types of investments; but the four most common are stocks/equities, bonds (also known as fixed income), mutual funds, and exchange traded funds (ETFs). The universe for each type of asset is vast – which means it’s critical to do your homework to find the right investments consistent with your risk tolerance. Knowing what you own is crucial to your long-term success as an investor. It’s also important to understand any fees associated with the funds you might want to purchase – because high fees can eat into performance.
Avoid Timing the Market
While short-term market movements and volatile conditions can make us question whether it’s a good time to enter the market, history shows that investing over the long run can have a profound impact on building wealth. After all – and as the old adage goes – a focus on time in the market, rather than timing the market, has been an effective strategy.
Insurance Planning
You’ve worked hard to accrue your assets; it’s critical you protect them and yourself from potential downside. Insurance protection may be a prudent addition to your holistic long-term plan and is an intrinsic investment that can help protect your family and your assets as they grow. Make sure you have ample protection and are able to pass down your wealth and assets to the next generation.
Consult a Financial Advisor
Investing can be overwhelming for even the savviest investors. If you’re interested in learning more about any of the terms, strategies or guidelines mentioned above, please consult a financial planning professional.
1 Foresters, their employees and life insurance representatives, do not provide, on Foresters behalf, financial, estate, tax or legal advice. Individuals should consult their financial, estate, tax or legal advisor regarding their situation.
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