Maybe you’ve made a new year’s resolution to start investing. Or you’ve been investing for a while, but you want to know if you should make any changes to your portfolio for 2022. Nobody has a crystal ball, but some investing strategies always ring true. And there are some things we do know about this year that can inform investing decisions.
There are some cardinal rules of investing that will always apply, no matter what the year ahead brings. Here are some of the ones that successful long-term investors live by.
4 Best Ways To Invest Your Money
Here are 4 bests way you can invest your money in 2022.
One of the cardinal rules of investing is diversification, or not putting all your eggs in one basket. This means that you need to have a mix of different kinds of investments in your portfolio. These are some of the types of investments that should make up your portfolio.
Mutual funds are themselves, diversified because they are a ‘basket’ of investment that you buy as a single investment. So, you might buy a mutual fund that consists of 25 or 50 (or even move) stocks. A single share of that mutual fund contains a little bit of each of those stocks. Each mutual fund has a portfolio manager who decides which stocks will be included in the fund and buys and sells stocks in the fund accordingly.
Mutual funds are a good choice for your portfolio in 2022, because the market had a big run in 2020 and 2021, and the diversification inherent in mutual funds can give you some protection in the event of a downturn.
Exchange-traded funds, or ETFs, are similar to mutual funds, in that they include multiple securities. But they trade on exchanges like stocks, so the price can change throughout the day. Mutual funds, on the other hand, are priced at the end of the trading day.
Some ETFs mimic market indexes, which makes them a good choice for investors who want to make market returns. You can buy an ETF that includes, essentially, all the stocks included in the S&P 500 index, for example, or in the Russel 2000 index.
Individual stocks can be an important part of your portfolio, but they can be risky. It’s important to “buy what you know,” or stick to the stocks of companies whose business you understand. Warren Buffet famously resisted buying technology stocks for years because he didn’t understand the business they were in. He’s since come around, but even before he invested in tech, he did pretty well.
Bonds tend to act as a hedge to stocks – when stocks do well, bonds don’t, and vice versa. But that’s not always the case. Bonds tend to struggle when interest rates are low, as they have been for some time. But with future rate hikes being discussed, bonds might become more attractive in 2022.
Cryptocurrency is an as-yet unproven commodity in the investing world. It’s been very volatile in the past and there’s no reason to think that volatility won’t continue. Keep that in mind when evaluating crypto as part of your overall portfolio.
2. Consider Your Tolerance for Risk
Having the best investments in the world won’t help you if they’re keeping. You awake at night. Before you decide to throw all your savings into cryptocurrency, think about what would happen if market conditions conspired to cut your portfolio in half. If you would immediately sell the rest and put the money in your sock drawer, you shouldn’t be taking that much risk. If, on the other hand, you’d consider a 50% loss to be an opportunity to buy more, your risk tolerance is high and you can stand to be in more aggressive investments.
3. Keep Your Time Horizon in Mind
When deciding how to invest, it’s important to keep in mind how long you have before you’ll need the money. The market always goes up over time, but there are always ups and downs along the way.
If you’re investing money that you will use to buy a house in five years, you don’t want to take a lot of risks. Keeping your money in relatively safe investments will ensure you have the funds for that down payment when you need them.
If you’re saving for the college education of a child who was just born, you can invest a little more aggressively. You can choose your own investments or use a target date fund in a 529 college savings plan. A 529 plan lets you save money and withdraw it tax-free if it’s used for qualified educational expenses. If you choose a target date fund, your investments start more aggressively and become more conservative as the child approaches college age (i.e., the ‘target date’).
If you’re just starting in your career and are saving for retirement, you can take more risks because you have a longer time horizon. If the market were to go south, you’d have time to make up for any losses.
4. Buy Low and Sell High
This is an investing adage that’s easier said than done. Since nobody has a crystal ball, it’s impossible to know when an investment has reached a peak – or a bottom. What you can do, though, is to invest regularly and use dollar-cost averaging to improve your returns.
Dollar-cost averaging simply means that you invest a certain amount of money each month (or week, or quarter). Keep the amount the same, regardless of the number of shares that money will buy. In this way, you are buying more shares when the price per share is lower, and fewer shares when the price per share is higher.
How Do I Start Investing Money?
Here’s an example. You invest $100 a month in ABC Corp. stock. In January, the stock is selling at $20 a share, so you buy 5 shares. In February, the price drops to $10 a share, but you still invest $100, so you add 10 shares to your portfolio. In March, the price goes up to $12.50 a share, so your $100 buys 8 shares. You now have 23 shares of ABC Corp., at an average price of just over $13 per share. You’re buying more shares when it’s cheaper, and fewer when it’s more expensive.
What’s the Best Way To Invest Money in 2022?
Now that you’ve thought about some of the longtime strategies of investing, consider what could happen in 2022.
The market has been on a long upside run. The S&P 500 returned 31.49% in 2019, 18.40% in 2020 and 28.71% in 2021. While 2022 could certainly continue this upward trend, it could also be time for a pullback. This doesn’t mean you shouldn’t invest, however – but you may want to avoid a portfolio that’s heavy in stocks.
It’s a midterm election year. Midterm election years, on average, have been weaker and more volatile for stocks than other years. But as every investor knows, past performance is not an indicator of future results.
If anyone knew for certain how 2022 is going to play out relative to investing, they’d be wealthy indeed by December. But if you keep these strategies in mind, and pay attention to what happens throughout the year, you could come out on top as well.