If you’re not investing, you probably should be. From saving for a more comfortable retirement to investing to build wealth, focusing now can greatly impact your financial future. Investing allows you to grow your money and reach your financial goals. It begins with identifying those goals and your timeline for achieving them. Here are six tips for investing.
1 Understand the importance of diversification
Remember that old adage, don’t put all your eggs in one basket. That’s important when it comes to investing. Diversification is key. It basically means dividing your money among different investments. Diversification will give you the safety of greater variety during market fluctuations. Owning different assets helps to reduce the overall risk of your portfolio, so no single investment can negatively impact you in too big a way. A basic idea of diversification could be as easy as investing in a broadly diversified index fund. The same goes for investing in different types of sector funds, which may perform differently under different market conditions. Asset allocation is another important part of investment diversification. For example, including different classes of investment, such as stocks, bonds, real estate, etc. It’s important to note that the primary goal of diversification is not to maximize returns, but rather to limit the risk and impact of market volatility on your portfolio.
2 Meet your match
If your employer offers a company match up to a certain amount into your retirement savings based on your annual contribution, you’ll want to invest the amount needed to get the max out of their match. This is one of the most important investing tips. Many employers offer this as a benefit of working for the company. An employer 401(k) match is basically free money and can add a substantial boost to your retirement nest egg.
3 Mutual funds offer many benefits
If investing in a volatile stock market seems a bit overwhelming, you may want to start with a mutual fund. A good mutual fund provides an investor with the important diversification that we mentioned above. Mutual funds are also professionally managed, taking the burden and stress off the individual investor. A mutual fund may hold a mix of stocks, bonds, and other securities. Additionally, there are index mutual funds that track popular indexes, such as the S&P 500. Many mutual funds can also be low-cost. While stocks represent shares in individual companies, mutual funds can include hundreds or even thousands of stocks, bonds, or other assets.
4 Consider dividend stocks
A dividend stock is a publicly-traded company that shares profits on a regular basis through dividends. Dividend stocks can provide balanced growth in addition to a regular income stream. If you’re nearing retirement, they can also produce cash flow to replace earned income. Dividends can provide income even as the stocks fall in the market. They can be a good addition to a stock portfolio.
5 Learn the tax benefits of certain types of investing
While a traditional brokerage investment account gives you immediate and unrestricted access to your money, a 401(k) or IRA can give you a tax advantage. One of the biggest tax benefits available to many investors is the ability to defer taxes when investing in a retirement savings account. Investing in the most tax-appropriate type of account for your goals may help you to maximize tax efficiency.
6 Understand the difference between investing and speculating
The key difference between investing and speculating is the level of risk and the certainty of receiving your capital back. Speculators chase high returns, rather than the probability of returns. Investing is buying an asset with the hope of getting returns. Decisions are made based on company performance. Investing also usually takes place over a longer time frame. It involves putting your money to work for years or longer. Speculators on the other hand are looking to make quick profits. If you’re speculating, only invest what you’re ok with losing. Always align your risk with your goals and comfort level when investing.
We hope these investing tips help you develop a plan to reach your investing goals. Remember, investing is a continuous process that needs your attention. Periodically review your investments and look at your risk tolerance. It may change over time. Stick to your plan and keep your focus on reaching your goals.
Want to learn more about investing? Read our “Guide to Investing in Stocks.”
*If you have in-depth questions regarding investing or investment strategies, you are advised to confer with an investment firm/specialist and with regard to tax benefits associated with investments, please speak with your tx advisor.