Investing can be fun. And the idea of growing your money substantially over time is enticing.
But investing for long-term success will involve more than just picking a stock or mutual fund and letting it ride. Include these four things.
1. Have a plan
Having a plan will first involve thinking about what your money is being invested for. Is it for retirement in 25 years? Or for buying a house in 10? Once you've set a goal like this, you can figure out how much you'll need to invest to get you there.
You can also figure out important information, like whether you'll fund your retirement over time with contributions into a savings plan like a 401(k) or IRA, or your home purchase with a lump sum of money that will grow with compound interest over time.
The table below shows how your retirement assets could grow in 25 years with various annual contributions invested at different rates.
This table shows how your lump sum of $50,000 for a house could grow in 10 years.
2. Educate yourself about your investments
You may never be a guru with investing, but you should have a general understanding of what you invest in. What types of products do the individual companies that you buy make, and which are most profitable? What types of risks do they have? Are they in new and promising industries with plenty of room for growth, and stable and consistent companies? Or are they companies in a dying sector with product lines that could become obsolete?
What types of investments or companies does it hold if it's a mutual fund? And what does performance look like in one of its best years, worst years, and on average? Answering these questions will help you set expectations for what a typical year may look like, as well as a full investment cycle.
It could also help you pick appropriate benchmarks. For example, bonds are typically less risky than stocks, but not all bonds are created equal. U.S. investment-grade bonds don't often lose money. But if you buy a high-yield bond or fund, you could end up with stock market-like losses in a bad year, such as 2008, when high-yield bond funds lost 26.16%.
And if you compared these losses to a benchmark like investment-grade bonds that gained 5.24% in that year, you may have found yourself upset.
3. Know your limits
How does stock market volatility make you feel? How have you reacted to it in the past? These questions are vital ones in determining your asset allocation model — your mix of stocks and bonds. This important combination will play a huge role in your rate of return, which factors into how fast your investments will grow.
But it could also determine how well you stay invested. If your holdings are too aggressive, you could end up timing the market — selling at low points so that you can stop losses and buying at higher points once you're not as scared anymore. This could lead to returns that are below average, which could make meeting your goals harder if it happens often.
Diversifying or adding safer investments, like U.S. investment-grade bonds, can reduce this risk. And if losses make you skittish, a move like this could help you become a more consistent investor. The table below shows the difference between a portfolio of 100% stocks versus 50% stocks and 50% U.S. investment-grade bonds during a bear market, bull market, and on average.
Average long-term rate of return
50% stocks/50% bonds
4. Review and make adjustments as needed
The more passive your investments are, the less maintenance is needed. ETFs and index funds will probably require the least amount of work. Because these types of funds track the indexes they invest in, you'll mostly need to rebalance if you hold other asset classes.
The more complicated your investments get, the more work they could take, both with researching and rebalancing. This includes ongoing research for individual stocks that you own, so that you can make sure your opinion about the company hasn't changed and that it still fits your objectives.
You should also review your progress toward your goal at least annually. Doing this could help you pinpoint whether or not you're on track or could come up shy. And if it turns out that your projections show you'll be short, make adjustments along the way.
For example, if you're currently saving $5,000, earning 8%, and have 25 years that you'd like to accumulate $500,000 in, you'll miss your goal by about $100,000 . Saving $1,500 more each year, increasing your asset allocation to 100% stocks so that you earn 10% each year on average, or giving yourself three more years could get you to your goal. And the earlier you start making these changes, the more minor they could be.
Investing can grow your accounts significantly over time, which could make meeting your long-term goals much easier. And although it may seem complicated, taking these steps can simplify the process and make you a more successful investor.
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