We are often asked, “What can I do to be a better investor?” There are many simple steps that you can take to improve your investment results. Many of these tips are topics which we devote an entire radio show or newspaper article to. If you would like to have a deeper understanding of any of the keys below, check out our podcasts and archive of articles at alderferbergen.com.
The first step to becoming a better investor is to understand the difference between savings and investing. Usually saving is for shorter term, smaller goals like a vacation or a car. Investing is for longer term goals like, usually more than 5 years away, like retiring or paying for college.
Before you begin investing, it’s important to put the rest of your financial house in order first. Compile a budget, make plans to pay off debt and build your emergency fund. Create a basic financial plan by listing your goals, over both the short-term and the long-term. Clarify and prioritize your goals. Make them as specific as possible. For example, “Retirement” isn’t a goal, but “Retire in 2021 with $3000 per month in income” is.
Once you have created concrete goals, you can go about the work of achieving them. Smart investing isn’t just chasing the highest returns. This is how people get into trouble like they did during the dot com bubble of the 1990s. Instead, work backwards from your goal and invest with the least amount of risk possible to achieve the returns you need to meet that goal. Also, understand your own tolerance for risk. If the thought of losing money in your account, even temporarily, is daunting to you, then placing all of your money in stocks is probably not the right move.
All investments carry some amount of risk. Historically, stocks have outperformed other investments over the long-term, but will be subject to volatility. Bonds are less volatile, but can still lose value. Take the time to learn the basics of any investments you plan to put in your portfolio. Keep realistic expectations about the kinds of returns you will be able to generate. Don’t confuse luck with skill. If you happen to start investing at the beginning of a bull market, it is probably unrealistic to expect to be able to achieve those returns over the long-term. Stock market returns are strongly mean-reverting, which means they will tend to go back to historical averages. A period of outperforming the average is likely to be followed by a period of underperforming the average.
Follow a written plan. The technical name for this is an “Investment Policy Statement” but just a sheet of paper with your goals and plans for reaching them will be helpful. This is a key to staying on track during rough periods in the market, but it can also help to keep you from taking on too much risk during good market periods. Your plan should include investment goals and timelines, minimum required returns, and the mix of assets you intend to use. Allocate your assets according to this plan. This will help you to avoid being too concentrated in any one asset class, like large company growth, or sector, like healthcare or technology. Don’t overload on any one stock, even your employer’s.
Don’t chase “hot” performance. The top performing fund or stock or even asset class for one year may not be the best one in future years. Also, don’t ignore “cool” performance. Instead, plan your asset allocation, and rebalance annually, taking profits from top performers and adding to underperforming areas. Most importantly, stick to your plan. Nervous investors often sit on the sidelines during down markets, but they also can miss the recovery. Missing a week or two of a market recovery can cut your returns significantly.
Start investing early. A $10,000 investment earning 8% grows to $21,589 in 10 years, but $100,627 in 30 years. Invest regularly and automatically. Payroll deduction is a great way because you will never miss the money.
Rebalancing your portfolio is important, but so is monitoring and revising your investment plan. Any time you have a big life event, birth, death, marriage, or divorce, you should reevaluate your plan. Even if you don’t have a major life event, you should review your plan once a year.
To hear the podcast of the Smart Money Management radio show on this topic, or others, go to our website at alderferbergen.com.
All performance referenced is historical and is no guarantee of future results.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Asset allocation does not ensure a profit or protect against loss.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual.
Securities and financial planning offered through LPL Financial, a registered investment advisor. Member FINRA/SIPC