By Nicholas Pell for FutureAdvisor
Investing can be daunting. You’re risking your hard-earned money, and the investment world is filled with complicated choices and incomprehensible jargon that can take a lifetime to master. It’s completely normal to feel uncertain — even a little afraid — about investing if it’s new to you.
But, that’s not a good reason to not invest. Truth be told, the idea of reaching retirement age without having grown your savings from their present-day value is a lot scarier.
Losing value to inflation is one of the main reasons investing is critical for long-term financial health. And creating a strong portfolio is essential to building wealth that outpaces inflation and secures your future, especially for retirement. Here are nine ways to take the fear out of investing so you can start making your money work for you.
Diversification is a core tenet of a strong portfolio. Diversifying means spreading your investments out across asset classes and geography so that poor performance in one category is offset by high performance in another.
Different asset classes do well in different situations, and different regions thrive at different times. For example, if stocks start to fall and all your investments are in stocks, you will be hit hard. If, however, you spread your investments out over stocks, bonds, real estate, and inflation-protected securities, as well as parts of the world, you also spread out your risk. If bundled correctly, a diversified portfolio not only preserves your capital in weaker markets but also can result in stronger returns.
2. Use ETFs, Not Stock Picking
Exchange-traded funds provide the diversification of index funds with the convenience of stock exchanges. With one investment, you can track assets that include stocks, bonds and commodities. ETFs have lower risk and require far less work than picking specific stocks. They also automatically rebalance over time as the economy changes, and they’re tax-efficient. They can be a great option for any investor.
3. Buy What You Understand
There are lots of convoluted investments out there — and lots of investors who get suckered into thinking they need something insanely complex to gain an edge over other investors. While it might seem like a good idea on the surface to have an active fund manager picking investments and creating something “special” for your portfolio, many of these funds don’t beat the market year over year. Simple investments, like ETFs that broadly mirror large parts of the markets, are not only good for your portfolio but also can be easier to understand and can give you additional piece of mind.
Related: How to Start Investing in Your 30s
4. Pick Your Risk Level Based on Historical Declines
Everyone has a different degree of risk that they are comfortable with based on their circumstances and personality. Going outside of your risk tolerance is a sure way to send fear and stress levels through the roof. When making investments, pick a risk level that you can live with and that factors in historical declines. Then when inevitable dips happen, you’ll be prepared to wait out the low points.
5. Invest With a Clear Goal in Mind
Investment goals are a powerful way to keep you motivated and to protect you from common mistakes that might derail your progress. The first step is to set your goals. Write them down, figure out a timeline for short- and long-term goals, and calculate how much money you want to save. It is important for your goals to be realistic and measurable so you can work toward achieving specific milestones.
Keep Reading: How to Invest $50,000
6. Write an Investment Policy Statement and Stick to It
Once you have your goals, write an investment policy statement. This statement not only defines your goals and objectives but also describes the strategies that will be used to meet them. An IPS provides the foundation, anchor and benchmark for all your future investments. It gets into the nitty-gritty details of your investment strategy, such as:
- Asset allocation — how much of each asset type you want to hold
- Risk tolerance — how much you can lose on paper in temporary downswings
- Liquidity requirements — how much cash, if any, you need to have accessible
7. Keep Saving Over Time to Smooth Your Returns
You never want to stop saving, even after your money is invested. The more you save, the more you can ultimately earn through compound interest. Saving also buttresses against risk and ensures that if a large unexpected expense arises, like a health event or natural disaster, you are prepared to handle it without deviating from your investment goals.
8. Learn Basic Investing Theories
Fear largely stems from the unknown. By learning the basics of investing, you’ll feel more confident and aware of what is going on with your investments. You’ll also be better equipped to make decisions and understand why there’s nothing to be afraid of when the market is fluctuating if you have done your homework and set up a strong, balanced portfolio.
9. Rebalance to Manage Your Portfolio Risk
Investing is not a “set it and forget it” proposition. The market changes, and rebalancing — maintaining the right mix of holdings in your portfolio — is essential to ensuring your portfolio remains diversified and within your risk parameters. Rebalancing is also an opportunity to exert some control over what your portfolio is doing and reassure yourself that everything is as it should be for your current circumstances. If you manage your own portfolio, rebalance it a few times a year. If you hire an investment manager, make sure rebalancing is part of the strategy.
Investing doesn’t need to be scary, overwhelming or confusing. Equip yourself with the knowledge, tools and strategies necessary to achieve your investment goals.
The views expressed herein are not intended to serve as a forecast, a guarantee of future results, investment recommendations, or an offer to buy or sell securities by FutureAdvisor. Differences in account size, timing of transactions and market conditions prevailing at the time of investment may lead to different results, and clients may lose money. Past performance is not indicative of future results.