When it comes to the best ways to invest in your future, you must keep things in mind, such as your goals, time horizon, and risk tolerance. Today, I am going to share with you some keys to investing in your future and portfolio diversification.
- Start as early as possible
Start investing as early as possible to take advantage of compounding returns and interest. Essentially, your investment returns will start to have their own returns as your value compounds. The market is full of ups and downs so being invested at a young age gives you lots of time to ride out the dips.
2. Make a budget.
In order to start investing in your future, it is important for you to determine how much you spend every month or year in comparison to how much you make. By setting aside resources for things such as food, clothing, entertainment, bills, emergency fund, and housing, you can feel comfortable knowing that you have not overinvested beyond your means.
3. Determine how much you can comfortably put aside each month to invest.
When it comes time to allocate your resources towards different asset classes, it is important to set realistic expectations for how much you can save each month. If you set expectations too high to where they seem unattainable you might feel discouraged and not contribute. Each month, you should invest only what you feel comfortable contributing.
4. Identify goals and time horizons.
When investing, it is important to keep time horizons in mind for particular goals. For example, if you are a 21-year-old with the goal of saving for retirement, you can afford to be riskier in your investments due to a longer time horizon. However, let us assume you are that same 21-year-old saving to buy a car in 5 years, you might be more conservative with the risk profile of an asset.
5. Diversify, diversify, diversify
The golden rule of investing is to diversify your portfolio. Diversification does not mean buying stock in just Facebook, Twitter, and Google. However, diversification would imply owning different asset classes, industries, and sectors. Diversification can also be achieved through the owning of mutual funds or ETFs. These assets are diversified in the sense that they often trace indexes such as the S&P 500. Diversifiable risk is the only risk that can be removed from a portfolio. When investing, you are always subject to market risk.
An example of a well-diversified portfolio would look similar to this:
- 10% individual growth/small-cap stock
- 10% individual blue chip/large-cap stock
- 10% bonds
- 10% gold
- 20% real estate/reit
- 20% S&P 500 index fund
- 20% Nasdaq index fund
6. Know what you own
One of my favorite principles of investing is to only buy what you know or understand. Oftentimes it can be tempting to buy an asset because of some positive news about a company. However, if you don’t understand why it is a good investment or what makes it react the way it does, you should steer clear.
7. Remember to rebalance as necessary
Once you start investing, you might find that your target weightings of certain assets are off from what they started at. Rebalancing should be used once you see that there is an imbalance. You might be thinking to yourself that an imbalance is good and that it should remain imbalanced. However, all asset classes have up and down years and you don’t always know when those years will be. By keeping a healthy balance of asset classes, you are hoping to have a couple outperform the market by as much or more as some assets underperform it.
8. Utilize dollar-cost averaging to make new investments
With regards to your budget and making new investments. You should adopt a habit of dollar-cost averaging. Dollar-cost averaging involves buying assets at the same interval such as every 2 weeks at the same time. By doing this, you hope to buy the highs and lows of the market to establish an average cost. This strategy works because the market has returned on average 7% per year since its existence.
9. Utilize different investment accounts for different goals and time horizons
If you are planning to save for retirement and do not mind having your money locked up in an account until you retire, a 401k or IRA could be right for you. Retirement accounts have special tax incentives to encourage you to save for retirement. 401ks and IRAs are pre-tax accounts which means that you put pre-tax income in and pay taxes on the amount when withdrawn at retirement. My favorite type of retirement account is the Roth IRA. A Roth IRA is a post-tax account meaning that you put taxed income into the account and can pull out tax-free distributions upon retirement. Roth IRAs can only be contributed to as long as you make less than $140,000 per year single or $200,000 if married. The max contribution to this type of account per year is $6,000.
10. Utilize a buy and hold strategy
The best strategy to use when investing is the buy-and-hold strategy. If you truly believe you have made a good investment, realizing gains might take longer than expected. However, it is important to have faith in your initial decision unless you have read new news or information that refutes what you previously thought.
11. Have patience the stock market is a waiting game
As said best by Benjamin Graham, “in the short-run, the stock market is a voting machine. Yet, in the long-run, it is a weighing machine.” This is one of my favorite quotes and can often explain certain market anomalies such as the boom of Tesla over the past five years. As we all know, Tesla and Elon Musk are very hot topics in our world. Through the rapid growth seen in Tesla in the last few years, we can see that the stock market performs similarly to a voting machine in the sense that investors will support a cause they believe in or have high future expectations of. Just because Tesla has a high valuation now, does not mean that it will have a high valuation in the future as we see the importance of healthy earnings growth and how profits drive a company’s growth long-term.
Merkwan Properties 