If you’re like most people, you know investing is wise. However, knowing the best investment strategy for your financial situation, age, risk tolerance and goals can be tricky.
We’ll review seven things every investor should know and do for more success, no matter if you’re just getting started or have been investing for decades.
1. Create a financial safety net before investing.
Before investing, build a cash reserve for unexpected expenses and hardships, such as a job loss, medical bill or home repair. A good savings target is three to six months’ worth of your living expenses.
For example, if your living expenses total $4,000 each month, make a goal to build up a minimum of $12,000. Keep your emergency cash in an FDIC-insured high-interest savings account, earning a competitive interest rate. That way, you know it will be there when you need it.
Investing is the right strategy for longer-term goals like buying a home, paying for a child’s college and retiring. A good rule of thumb is to invest a minimum of 10% to 15% of your gross income for retirement every year. Investing requires some risk, but without it, you aren’t likely to earn enough growth to achieve significant financial goals, such as retiring.
2. Invest earlier to build more wealth.
The earlier you begin investing, the easier it is to build significant wealth. Even investing small amounts is better than waiting to get started. Consider two investors who receive the same return and set aside the same amount each month.
Let’s say Emily starts investing at age 40 and stops at age 65, her desired retirement age. Over 25 years, she invests $300 monthly and earns 8% on average. Her account balance will be approximately $290,000.
Brad starts investing a decade earlier at age 30 and also plans to retire at 65. He also invests $300 monthly and receives an average 8% return. But Brad ends up with nearly $700,000 after those 35 years.
Getting a ten-year head start allows Brad to retire with an additional $400,000 in his retirement account. In other words, time is powerful for investors. Never believe you should wait to invest because making up for lost time can be challenging and costly.
3. Have a diversified portfolio to manage risk.
Choosing individual stocks isn’t wise for the average investor because it’s impossible to predict whether their prices will rise or fall. It’s better to pick funds, which are collections of hundreds of underlying investments, like stocks or bonds. Using a robo-investing platform can be a convenient way for investors to purchase them. However, only 17% of investors have used a robo-advisor, according to Finder’s Consumer Confidence Index.
Having a diversified portfolio results in higher average returns with lower risk. That’s because when some of a fund’s securities lose value, others may go up or remain stable.
The stock market’s average return since the 1920s has been 10%. So, if you have a long time horizon, keeping most of your portfolio in stock funds is wise. While stock prices can be volatile in the short term, they’re likely to rise over the long term, allowing your account value to grow significantly.
4. Investing through retirement accounts saves money.
When you own investments through a tax-advantaged retirement account, such as an IRA or 401(k), you simultaneously reduce taxes and build wealth. Most employers and investing firms offer traditional and Roth accounts, which give you different benefits.
Traditional retirement contributions are tax-deductible, giving you a tax break in the current year. You defer tax on contributions and earnings until you make future withdrawals in retirement. With a Roth, such as a Roth IRA or 401(k), contributions are taxable but give you tax-free retirement withdrawals.
Many employers offer a retirement plan, such as a 401(k) or 403(b), and some even match contributions. But even if your employer doesn’t match a portion of your contributions, make a goal to maximize a workplace, self-employed or individual retirement account annually.
READ ALSO: Changes coming to Roth retirement catch-up contributions at work
5. Invest in various tax-advantaged accounts.
If you want to save money, consider using additional tax-advantaged accounts:
- 529 savings plan: Allows you to choose investments to pay education expenses for yourself or another family member. Contributions are taxable, but the earnings in a 529 grow tax-free. Your distributions are tax-free when you use the funds for qualified education costs, including private secondary school (up to $10,000 per year), college tuition, room and board, computer equipment, books and supplies.
- Health savings account (HSA): Allows those with an HSA-eligible health plan to pick investments and use the balance to pay qualified healthcare costs with no spending deadline. Contributions are tax-deductible, and withdrawals are tax-free when you spend them on eligible medical expenses.
- Flexible savings account (FSA): Allows those with employer-sponsored accounts to invest in a menu of options to pay qualified healthcare and childcare expenses. Contributions are tax-deductible, and withdrawals are tax-free when used annually for eligible costs.
READ ALSO: 7 financial accounts you need for a richer life
6. Use a buy-and-hold investing strategy.
Since volatility in the financial markets is uncontrollable, it’s wise to use a buy-and-hold strategy over the long term. Short-term market fluctuations are relevant only if you must liquidate investments for everyday spending.
Therefore, never make irrational decisions like selling investments when prices decline or buying when prices rise. Have a long-term mindset and aim for growth over many decades instead of year-to-year or week-to-week.
7. Get investing advice when needed.
If you’re unsure how to pick investments or how much to invest, get advice from a financial advisor, your retirement plan custodian or a robo-advisor representative.
About the Author
Laura Adams is a money expert and spokesperson for Finder. She’s one of the nation’s leading personal finance and business authorities. As an award-winning author and host of the top-rated Money Girl podcast since 2008, millions of readers, listeners and loyal fans benefit from her practical advice. Laura is a trusted source for media and has been featured on most major news outlets, including ABC, Bloomberg, CBS, Consumer Reports, Forbes, Fortune, FOX, Money, MSN, NBC, NPR, NY Times, USA Today, US News, Wall Street Journal, Washington Post and more. She received an MBA from the University of Florida and lives in Vero Beach, Florida. Her mission is to empower consumers to live healthy and rich lives by making the most of what they have, planning for the future and making smart money decisions every day.
This article originally appeared on Finder.com and was syndicated by MediaFeed.org.
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