Investing is an extremely important element of financial planning. Without investments, your nest egg will probably not grow fast enough to meet your needs at retirement. Despite what you may have grown to understand about the financial markets, its not difficult to become a successful investor.
In order to become a successful investor you must have a strategy. However, since many of us do not have the time to dedicate to researching individual stocks, buying and selling every-time the market moves, we need something simple and proven. The following tenets make investing a simple and painless process.
Start Investing Early
Making the decision to begin building your portfolio early will enable you to leverage the power of time and large market (economic) movements. As I’m sure you are aware, the stock market can be extremely volatile. Despite this downside to investing, the market has a tendency to move up more than it moves down. This is especially true over the long run.
Investing early will ensure that you begin to reap the benefits of long-term capital growth as soon as possible. Other benefits to investing early include the ability to deduct your Individual Retirement Account (IRA) contributions from your taxes. By writing off these investments, you can lower your tax liability and increase your tax return.
As mentioned earlier, the market can make some serious moves. When this occurs many investors decide not to invest. One of the best ways to grow your portfolio is to invest consistently, especially when the market is pulling back. Many investors regret not investing when the market was weak, make sure you are not one of them.
When you continue to invest, even when the market is not doing so well, you are setting yourself up for great growth when the economy turns back around (which it always does, sooner or later). The best way to invest consistently is to allocate a small portion of your paycheck to your investment account. This way every time you get paid, you grow your portfolio at the same time.
Diversify Your Assets
Smart investors understand that diversifying their assets reduces the potential impact of unsystematic risks (risks that affect individual companies) and maximizes potential reward. Diversification is a critical part of successful investing due to the nature of global economics and investor psychology.
In order to diversify your portfolio, you must include stocks or funds with a variety of different charistics. This includes not only a mix of stock and bonds but also assets from different business sectors. Portfolio’s can be easily diversified though the use of Mutual Funds and Exchange Traded Funds.
There are 3 critical tenets of successful investing; starting early, investing consistently and diversification. A investment strategy developed around these core elements will significantly increase your chances of success.