Investing is the key to reaching many of your long-term financial goals. Although the process may seem overwhelming or intimidating, following best practices and being aware of common mistakes can simplify the process plus, minimize risk. Here are five “do’s” and “don’ts” to investing you can apply to your strategy:
Before investing in any stocks, bonds, employer-sponsored retirement plans, or any other form of investment, adequate research is important to understanding the strengths, weaknesses, and risks of each option. Depending on your age, income level and other factors, some investment options are more suitable than others. If you’re investing in individual stocks rather than index funds, diligently research the companies and their performance. Do not choose stocks solely based on how much you like or dislike a company.
Diversification – Owning a variety of investments which respond differently to market conditions – is the key to reducing risk. If your entire savings is in one form of investment, such as technology stock, and the stock performs poorly, your loss will be substantial. In contrast, if technology stock is only a small portion of your investment assets, a decrease will have less impact on your portfolio. A simple way to ensure your investments are diversified is to invest more heavily in index funds than individual company stocks.
Do: Understand fees
Understand the fees behind each of your investment options and aim to minimize how much you pay. Examples of fees you should be aware of include transaction fees (charged by brokerage accounts each time you buy or sell stock), annual account fees, and investment advisory fees.
Do: Take advantage of employer-sponsored retirement plans
Investing for your retirement should be a top priority. Most employers offer retirement investment options and many even offer to match a certain percent of your contributions. Take advantage of your employer’s program and contribute at least as much as they’re willing to match. If you’re a young professional with high earning potential in the future, consider choosing a Roth 401(k) over a traditional 401(k), as it may offer a tax advantage. Before enrollment consult with your Human Resources department to confirm how your elected percentage will impact your monthly pay.
Do: Scale back your expectations
You shouldn’t approach investing with a get-rich-quick mindset. Aim for steady growth. Even if you’re a young professional who has opted for an aggressive approach to your retirement investments, it can take time to grow substantial wealth.
Don’t: Try to predict the market
You can’t predict how the market will perform, so you shouldn’t make investment decisions based on speculations. Make decisions based on research, and deal with economic downturns as they come.
Don’t: Lead only with emotion
A big challenge of investing is understanding how your emotions impact your investment decisions. Every market movement is reported on by the media and becomes a trending topic on social media, which may drive investors to react out of extreme optimism or fear. However, investment markets can rise or fall sharply in a matter of days, it’s often best to sit tight and ride through upturns and downturns.
Don’t: Invest everything you have
While it may be tempting to invest all or nearly all your cash savings when the market is doing well and you’re seeing growth, keep in mind market investments are for the long-term. Ideally, you won’t need that money for many years. Maintain some of your cash savings to cover immediate needs as well as an emergency fund so you don’t have to touch your investments in order to pay for unexpected expenses.
This tip goes hand in hand with understanding your emotion. Obsessing over your investment decisions by checking them multiple times a day and making purchases or sales in a panic after learning about market movement in the media won’t help your investments in the long-run.
Don’t: Wait too long
The younger you are, the more you stand to gain from investing due to compounding interest. Compounding means your contributions earn interest on the initial amount invested, and on the interest you accumulate over time. The earlier you start investing, the greater potential for investment earnings.
If you aren’t investing yet, ask yourself “Why not?” Especially if you’re a young professional, time is on your side. Start investing soon and remember small contributions are better than no contributions. If you’re considering investing later in life, remember it is not too late to benefit, as investing your savings may at least help you combat inflation.