There are a number of strategies and approaches to consider when deciding how best to invest your money. Choosing between the various asset classes, active or passive approaches, and a litany of timeframes can certainly be overwhelming. So, how should you decide which investment strategies are the best to pursue?
Whatever your financial decisions, there are a few timeless guidelines that will help direct you to the best strategy. Here are five important investment strategies to adhere to when deciding where to place your money.
Match Your Means and Objectives
When thinking about the best investment strategies to pursue, it is wise to take some time to consider both your starting point and your ideal finish line.
At the end of the day, your investment goals should be consistent with the overall objectives you have for yourself and your family. Understanding where you want to ultimately end up is the best way to make sure that you eventually arrive at your desired destination. Therefore, it is important to define what these are, so you can work backwards to make sure you successfully meet them.
For instance, if your investment goals do not require you to take an aggressive approach, then there is no reason to take on unnecessary risk. Investing in bonds or Certificates of Deposit with a guaranteed return of 5% per year might be sufficient to help you achieve your goals. If this is the case, putting money at risk in the stock market would not be a prudent move.
The best strategies are the ones that fit with your ultimate desires. Make sure that whatever path you choose does just that.
Learn How the Market Works
Historically, the market has done well, with the Standard and Poor 500 (NYSE:SPX), an index designed to mirror the largest publicly-traded companies in the U.S., providing over 11% returns over the past half-century. (Adjusted for inflation, this number is slightly under 7%.)
Taken over the long haul, investing in the stock market can help add significant value to your wealth. Markets, however, go both up and down. Certain weeks, months, or even years will see the stock market perform worse than in others, leading to losses in your portfolio. The market tends to bounce back, but it rewards patience and consistency (see below).
Therefore, prepare yourself mentally (and emotionally!) to absorb losses along the way. Individuals who decide to pull their funds out at the first sign of trouble or after a precipitous drop will forgo the ability to recoup their losses when the market eventually rights itself.
The ability to weather the storms while taking the long view is a key strategy for successful investing.
Make Sure to Diversify
Everyone wants to find the next Apple (NASDAQ:APPL) or Google (NASDAQ: GOOGL), and watch as their initial investment multiplies in value many times over. However, for every scorching hot success there are many more start-ups that do not pass the test of time, and you can get burned if you put all your eggs in one basket.
Diversifying your investments is a way to spread the risk among multiple companies, industries, and even asset classes.
For instance, the 60-40 investing strategy became popular in part because it presented a simple rule for diversifying investor portfolios between 60% equities and 40% bonds. This is a natural hedge, as during lean periods when the stock market hits a rough patch, having a significant amount of your holdings placed in bonds can shield you from heavy losses.
Mutual funds also allow you to spread out your risk, as they combine a number of different assets packaged into a single security. In a similar fashion, index funds and ETFs are also designed to allow you to purchase multiple assets in a single security, though often times these tend to be built to mimic specific markets or industries so they may not offer the same amount of diversification as other options.
You can review analyses pages for a wide variety of publicly-traded securities on TipRanks, allowing you to gain valuable information into the make-up of these funds and helping you to understand their various levels of diversification.
Be Consistent
The importance of staying the course has been demonstrated time and again. Monies invested are monies that can be earning money, and the more you are able to align your lifestyle with consistent savings and investing the greater your eventual wealth can be.
The wonders of compound interest play a large role in this dynamic, as the interest you receive will begin to earn its own returns. This allows your investments to grow at an increasingly greater velocity, rewarding those who have the patience to remain invested over years and decades.
Continuing to place money into your investments at regular intervals will also help. The approach of dollar-cost averaging is geared towards encouraging investors to contribute the same amount of money into their portfolio at regular intervals.
By doing so you avoid worrying about short-term fluctuations in the market, as your investments will balance out over time by definition. In other words, when the market is in a downturn you will purchase more assets, and when it rises your money will buy less. As the name suggests, you have averaged out your acquisitions.
Staying the course, even when things look dreary, will help you to continue growing your wealth.
Make Changes When Necessary
There is a world of difference between being consistent and being stubborn. You should periodically take the time to review your investment strategy to understand if it is still serving you well.
For starters, your objectives may have changed along the way. As you embark upon your investment journey, with decades of working years in front and limited liabilities holding you back, you may elect to pursue more aggressive strategies. As you get older, however, your preferences may change. We pick up responsibilities throughout our lives, and having a family with its own set of obligations and expenses may move the needle towards more risk averse assets.
This is a natural occurrence. There are even mutual funds with specific time horizons which will undergo the same process, becoming increasingly more conservative as the years progress.
It is good to take the long-term view when making investment decisions. But that does not mean that you cannot change course throughout your lifetime.
Conclusion: Sound Investing Strategies for the Future
Investing involves making an intentional trade-off between present-day consumption and future savings. You put away money with the hopes that it will return both principal and interest later on.
There are many different strategies to use when investing, and not all of them are mutually exclusive. Adhering to the principles outlined above can help you to maximize your investments, while giving you the best chance to successfully achieve your desired outcome.
At the end of the day, the purpose of investing is to provide you with the financial future that you envision for yourself and your family. Keeping that in mind while making investment decisions will always serve you well.
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