Investing money wisely doesn’t necessarily mean you have to focus exclusively on low-risk investments. The best investments for you can be quite different from the investments that work for your neighbors, your friends or your parents. The key to investing wisely is to find good investments in line with what you’re trying to accomplish with your portfolio.
Whether you’re trying to purchase a home, send your children to college or save money for retirement, learning the best ways to invest money can help you reach your goals a little faster.
5 Tips for Investing Your Money
You invest to make more money, but some investment tactics can work better than others. Here are five tips for investing your money well:
1. Allocate According to Your Investment Objectives
Your investment objective defines what you want to get out of your investments. Although every investor wants to make money, there are many different types of investment opportunities. For example, to maximize capital gains in your portfolio, consider buying stocks. If you want to generate income, you might prefer bonds, CDs or other income-producing investments.
Assess your timeline when you’re allocating your portfolio. If you have a short-term investing objective, you’ll want to consider more secure investments, like Treasury securities or CDs, as opposed to long-term, volatile assets like stocks.
2. Diversify Your Assets
Even the safest investments come with risk, but you can minimize risk by diversifying your portfolio, such as by including different types of investments like stocks, bonds, cash and real estate. Diversification increases the probability that at least some of your investments will offer good returns if others lose value or prove to be stagnant. Additionally, it’s wise to diversify your investments in each category.
3. Factor In Your Risk Tolerance
Your risk tolerance describes how comfortable you are with the volatility of your investments. For example, if you can’t stomach the thought of your investments dropping by 20 percent or more, you might want to lighten up your stock allocation.
Even if you have little tolerance for risk, however, you shouldn’t necessarily avoid investing in stocks completely. A balanced portfolio can give you the stability of bonds with the long-term growth potential of stocks.
4. Consider Passive Investing
For many investors, passive investing is a wise way to invest. Passive investing involves owning mutual funds or exchange-traded funds that mimic stock market indexes like the S&P 500 for a very low cost. Although market-tracking funds will never “beat” the market, they should give you a market-like return. In fact, famed investor Warren Buffett, the so-called “Oracle of Omaha,” suggested that for most investors, a simple S&P 500 index fund is the best place to invest money.
5. Don’t Frequently Monitor Returns
Unless you’re focused on a short-term investing strategy, monitoring your returns on a daily or weekly basis can be stressful and might force you into bad decisions. Do your best to resist temptation and only check your portfolio once per quarter or no more than once per month. If you’ve invested wisely and created a diversified portfolio in line with your investment objectives and risk tolerance, there’s no need to check more frequently.
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