Investing is a long game. Whether you want to invest for retirement or grow your savings, when you put money to work in markets it’s best to set it and forget it. But successful long-term investing isn’t as simple as just throwing money at the stock market—here are seven tips to help you get a handle on long-term investing. 1. Get Your Finances in Order Before you can invest for the long term, you need to know how much money you have to invest. That means getting your finances in order. “Just like a doctor wouldn’t write you a prescription without diagnosing you first, an investment portfolio shouldn’t be recommended until a client has gone through a comprehensive financial planning process,” says Taylor Schulte, a San Diego-based certified financial planner (CFP) and host of the Stay Wealthy Podcast. Start by taking stock of your assets and debts, setting up a reasonable debt management plan and understanding how much you need to fully stock an emergency fund. Tackling these financial tasks first ensures that you’ll be able to put funds into long-term investments and not need to pull money out again for a while. Withdrawing funds early from long-term investments undercuts your goals, may force you to sell at a loss and can have potentially expensive tax implications. 2. Know Your Time Horizon Everyone has different investing goals: retirement, paying for your children’s college education, building up a home down payment. No matter what the goal, the key to all long-term investing is understanding your time horizon, or how many years before you need the money. Typically, long-term investing means five years or more, but there’s no firm definition. By understanding when you need the funds you’re investing, you will have a better sense of appropriate investments to choose and how much risk you should take on. For example, Derenda King, a CFP with Urban Wealth Management in El Segundo, Calif., suggests that if someone is investing in a college fund for a child who is 18 years away from being a student, they can afford to take on more risk. “They may be able to invest more aggressively because their portfolio has more time to recover from market volatility,” she says. 3. Pick a Strategy and Stick with It Once you’ve established your investing goals and time horizon, choose an investing strategy and stick with it. It may even be helpful to break your overall time horizon into narrower segments to guide your choice of asset allocation. Stacy Francis, president and CEO of Francis Financial in New York City, divvies long-term investing into three different buckets, based on the target date of your goal: five to 15 years away, 15 to 30 years away and more than 30 years away. The shortest timeline should be the most conservatively invested with, Francis suggests, a portfolio of 50% to 60% in stocks and the rest in bonds. The most aggressive could go up to 85% to 90% stocks. “It’s great to have guidelines,” Francis says. “But realistically, you have to do what’s right for you.” It’s especially important to choose a portfolio of assets you’re comfortable with, so that you can be sure to stick with your strategy, no matter what. “When there is a market downturn, there’s a lot of fear and anxiety as you see your portfolio tank,” Francis says. “But selling at that time and locking in losses is the worst thing you can do.” 4. Understand Investing Risks To avoid knee-jerk reactions to market dips, be sure you know the risks inherent in investing in different assets before you buy them. Stocks are typically considered riskier investments than bonds, for instance. That’s why Francis suggests trimming your stock allocation as you approach your goal. This way you can lock in some of your gains as you reach your deadline. But even within the category of stocks, some investments are riskier than others. For example, U.S. stocks are thought to be safer than stocks from countries with still-developing economies because of the usually greater economic and political uncertainties in those regions. Bonds can be less risky, but they’re not 100% safe. For example, corporate bonds are only as secure as the issuer’s bottom line. If the firm goes bankrupt, it may not be able to repay its debts, and bondholders would have to take the loss. To minimize this default risk, you should stick with investing in bonds from companies with high credit ratings. Assessing risk is not always as simple as looking at credit ratings, however. Investors must also consider their own risk tolerance, or how much risk they’re able to stomach. “It includes being able to watch the value of one’s investments going up and down without it impacting their ability to sleep at night,” King says. Even highly rated companies and bonds can underperform at certain points in time.
0 Comments
Leave a Reply. |
AuthorWrite something about yourself. No need to be fancy, just an overview. Archives
April 2022
Categories |