Every person being is unique. Some people are inherently risky, while others would much rather play it safe, even if it means giving something up because of it. From an investing perspective, that means the best strategy will always be customized to you and your financial goals, while also following a few concepts that apply to successful investing in general. Here are 6 things to consider.
People invest for different financial goals, and each of those goals will have a unique time horizon. For example, a goal like retirement could be decades into the future, giving it a longer time horizon than something like saving for a car in the next year.
Investments with longer time horizons allow investors to absorb more risk since they have plenty of time to make up for any volatility that’s bound to occur. Therefore, long-term investing with time horizons well into the future allows people to take advantage of compounded growth, realizing exponential gains that result in far greater returns over that longer time horizon.
Risk tolerance gauges how well an investor is able to emotionally and psychologically absorb volatility in their portfolio. While it’s true that no investor wants to lose money, some are better than others in keeping the bigger picture in mind – that short-term losses will always accompany long-term gains.
Someone with a high-risk tolerance is able to maintain that focus in comparison to a person with very low risk tolerance that can’t bear to watch their money go backwards, even for a short amount of time. Ideally, you want to align your time horizons with the amount of risk you take. Once again, if retirement is well down the road, you can afford to absorb more risk because of ample recovery time. Obviously, time horizon and risk tolerance go hand-in-hand.
Diversification is essential for minimizing risk in your portfolio. By dividing your investments into different asset classes – stocks, bonds, and cash – as well as multiple positions in each class, you’re spreading your money out and protecting it from concentrated losses. The more positions you hold, the better your investments can absorb such losses.
Time is one of an investor’s greatest assets. The sooner you start your investing, particularly for longer-term goals like retirement, the faster your investments can start realizing exponential growth. That is because of the power of compound interest, When people think of interest, they often think of debt. But interest can work in your favor when you’re earning it on money you’ve saved or invested.
Compound interest is the principle by which your interest earns interest. And then that interest earns you interest and it goes on and on. As your balance gets larger, your interest payments grow larger, and ultimately your money grows even faster.
Lastly, investing is logical. It relies on hard facts and solid economic data. It’s not a place to let emotions get the best of you and drive your decision-making process. As an example, stocks don’t fare well during a recession, and it’s easy to get emotional while watching multiple days of losses in a row. However, the logical side of you knows that at some point the markets will turn around, erase those losses, and get back into positive territory.
An emotional decision would be to sell during those losses which, in the extremely short term, might make you feel safer. But making that decision also means you will miss out on all of those gains once the market recovers.
On the opposite side of that scenario, greed can tempt you into buying into the market as it peaks. Should the market experience a pullback, buying at a high point means you will likely see a loss on that purchase. Ultimately, you want to stay logical with your investing and stick to your plan, especially through rough investment seas. Your financial well-being will thank you in the long run.