From Novice to Expert: Cultivating Winning Investor Habits
Investing transcends the pursuit of wealth or the thrill of market speculation. It goes beyond just paying bills and managing debt like mortgages, credit cards, and student loans. Investing can help you set ambitious goals and create a plan for long-term financial stability.
Here are six steps to help navigate even tough markets and potentially reach your financial goals.
Create a Plan
Lay the groundwork for your investment journey with a solid plan. This will help you assess your current situation, define your goals, and create a roadmap to achieve those goals.
A financial advisor can help you craft a personalized financial plan. Also available are do-it-yourself options and online tools.
Regardless of the approach, building a plan based on sound financial principles is crucial for investment success.
Stick with your plan: Don't panic and abandon your plan when markets get rough. It's natural to feel jittery during downturns, but successful investors stay the course. They choose an investment mix they can stomach in both good and bad times.
Remember the 2008 financial crisis? Cash might have seemed like a safe haven, but a Fidelity study showed those who stuck with the stock market came out far ahead.
Over the next ten years, investors who remained calm saw their accounts grow by 147%. This was twice as much as those who sold during the crisis. Interestingly, most investors didn't react, but a quarter who sold out missed the rebound entirely.
Feeling anxious during dips is normal. The key is to trust your long-term plan and ensure your investments have enough growth potential to reach your goals. If volatility is unbearable, consider adjusting your portfolio to a less risky mix you can stick with.
Be a Saver not a Spender
Don't let market gyrations distract you from your savings goals. Building a secure future starts with consistent saving. The more you save and the sooner you start, the better positioned you'll be to reach your goals.
As a general rule, aim for putting away at least 15% of your income. This is a recommended starting point, but you should adjust based on your needs.
The national retirement score says Americans may only cover 78% of retirement expenses by 2023. This means that people may not have enough money to pay for all of their retirement costs.
Saving consistently is very important for young people because they have more time to benefit from compound interest. Regardless of your age or income, prioritizing saving is crucial for a secure financial future.
Diversify
Owning different types of investments like stocks, bonds, and cash is important for successful investing. It helps manage risk by not putting all your eggs in one basket.
Choosing the right investments can help create a portfolio that balances growth and risk based on your needs. This balanced approach can help make it easier to stick to your plan during market ups and downs.
Diversification isn't a guarantee against losses, but it aims to find a sweet spot between risk and reward. You can diversify not just across asset classes (stocks, bonds, cash) but also within them. Here's how:
Diversify your investments by buying stocks in different areas, industries, styles, and sizes to reduce risk and boost returns.
Diversify bonds by borrower risk, repayment time, and issuer type (government or corporate) to lower risk and increase returns.
Consider Low-Fee Investment Products: The market may be unpredictable, but you can control your investment costs. A study by Morningstar® showed that funds with lower fees tend to do better than others in their category. Choose low-cost investment products that deliver strong performance for their fees. This means keeping more of your hard-earned money working for you.
Remember Taxes
Using accounts like 401(k)s, IRAs, and annuities can increase your post-tax earnings. This is called "account location" - strategically placing your money in accounts with the most favorable tax treatment.
A related concept is "asset location." This involves putting different investments in different accounts based on their tax efficiency. Think of asset location as the art of putting the right investments in the right accounts. It considers how much tax an investment generates and how the account you hold it in treats those taxes.
Alternatively, low-turnover index funds or tax-exempt municipal bonds are better for taxable accounts to maximize tax benefits.
Consider taxes when making investment decisions for potential future returns, but don't let them be the sole factor. Taxes play a significant role in determining your overall investment strategy. By understanding the tax implications of your investments, you can potentially increase your returns in the long run. It's important to weigh the impact of taxes on your investment decisions but remember to also consider other factors.
Bottom Line
Investing might seem intricate, yet the cornerstone habits of prosperous investors are refreshingly straightforward. Create a smart plan, save money, invest wisely, and be aware of taxes to achieve success. These key traits will help you reach your goals.
Sources:
https://www.fidelity.com/learning-center/personal-finance/six-habits-successful-investors
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
Asset allocation and diversification do not assure or guarantee better performance and cannot eliminate the risk of investment loss. As with any investment strategy, there is the possibility of profitability as well as loss.
This site may contain links to articles or other information that may be on a third-party website. Advisory Services Network, LLC is not responsible for and does not control, adopt, or endorse any content contained on any third-party website.
This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.