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Investors ultimately have one goal in mind: to grow their wealth with minimal effort. Some do a better job of this than others, but the difference between success and failure isn’t always about how much money each person invests.
Investing large sums certainly helps if you want to become a millionaire, but there are a few other things you need to bear in mind if you want to grow your wealth. Here are three of them.
1. Ups and downs are a normal part of investing
Companies have good and bad quarters, and their shares rise and fall accordingly. The same is true of the market as a whole. Sometimes, market corrections happen and a lot of people lose money, even experienced investors.
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One of the hard truths about investing is your holdings will take a dip at some point, even if you’ve invested in large, stable companies with huge competitive advantages over others in the industry. And losing a little money once in a while doesn’t mean you’re doing anything wrong — it happens to everyone.
The important thing is not to panic. Most of the time, all you have to do is wait for your portfolio to recover. Long term, the stock market has delivered strong returns. Panic selling, on the other hand, can turn your temporary losses into permanent ones.
That said, sometimes selling is the right choice. Keep an eye on your investments and watch for red flags, like a company consistently losing market share to its competitors. That could be a sign things aren’t going to turn around, and you’d be better off cutting your losses.
2. Trying to time the market usually goes wrong
Some people treat the stock market like a lottery. They invest heavily in a few small, relatively unknown companies in the hope they’ll make a fortune overnight — and that actually happens to a lucky few. But the large majority of people who take this approach end up losing a lot of their initial investment.
If you want to make a fortune and keep it, you’re going to have to adjust your expectations about your timeline. Growing your wealth over a few decades might not be what you had in mind, but you’re much more likely to hold on to that wealth if you take your time and focus on high-quality companies that offer a lot of promise.
Dollar-cost averaging is an easy alternative to trying to time the market, and you might already be doing it in your retirement accounts. This is where you invest a set dollar amount on a regular schedule. It might be $100 every week or $200 every month — whatever works for you. The idea here is that sometimes you’ll invest when share prices are high and other times when they are low. Over the long run, they balance out, and you’ll end up paying a fair price for all of your shares.
3. You shouldn’t put all your eggs in one basket
Investing all of your money in a handful of stocks is a recipe for disaster, because if just one or two of those stocks take a dip, you’ll lose a lot of money. Ideally, you should spread your money around between at least 25 different stocks in various sectors. This way, even if a whole industry experiences a setback, you’ll have other stocks to pick up the slack.
If you’re not comfortable choosing individual stocks, an index fund is a simple way to diversify your savings. They instantly give you a stake in hundreds or thousands of companies, and most are pretty affordable to own. The best S&P 500 index funds, for example, only charge about $3 per year in fees on a $10,000 portfolio.
Don’t forget to rebalance your portfolio periodically as well. Some investments will do better than others, and this can result in them making up a larger share of your holdings than you originally intended, potentially exposing you to too much risk. Make a habit of reviewing your investments at least annually, giving you a chance to make whatever changes are necessary to keep yourself on track.
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