Investing can be intimidating. There’s a unique language, with expense ratios, ETFs, and dollar-cost averaging and there’s a lot at stake, like your retirement. However, you can do this and we can help. With the following five keys, you’ll be well on your way toward becoming a confident, successful, do-it-yourself investor.
The comments above & below are edited ([ ]) and abridged (…) excerpts from an article written by Matt Bell (WiseBread.com)
1. Commit to the market
The stock market has been on a tear. Since bottoming out in March 2009, it nearly tripled in value by the end of 2016 and, since the start of this year, it has only climbed higher. Unfortunately, for many people, it doesn’t matter. According to a recent Gallup poll, about half U.S. adults are not investing in the market.
- Some waffle; they’re in when it seems safe; they’re out when trouble strikes.
- Pros don’t waffle. They’re in it for the long haul because they know that as a long-term investment, the U.S. stock market has delivered average annual returns of nearly 10%.
2. Know your goal
The most common investment goal is retirement. It that’s your goal, make it as specific as possible.
- How much money do you want to have?
- By when?
- How much do you need to invest each month in order to get there?
These questions can feel overwhelming at times, but you need to answer them in order to get a clear picture of your path to a secure retirement…
3. Determine your optimal asset allocation
While many of the headlines in the investment press are about which investments to choose, there’s a different factor that’ll have an even greater impact on your investing success. It’s making sure you’ve determined your optimal asset allocation i.e. how you divvy up the money you invest between asset classes. The two most important asset classes are:
- and bonds
(preferably, stock and bond mutual funds, since mutual funds enable you to hold a diversified “basket” of stocks and bonds).
- Generally, when you’re young, your portfolio should tilt more toward stocks. Yes, your portfolio will experience sharper ups and downs, but you should have the time to ride them out, and a higher-risk portfolio should lead you to higher returns.
- As you get older, you would be wise to reduce stock exposure and increase your allocation to bonds…
4. Choose an investment selection process
Pay no attention to headlines touting “This Year’s Top Mutual Funds” or “Why You Must Own Gold Now.” and tune out all hot tips from your brother-in-law or coworker. What you need is a trustworthy investment selection process.
- You could keep it super easy by choosing a target-date mutual fund.
- These funds have years as part of their name, such as the Fidelity Freedom 2040 fund. Just choose the fund with the year closest to the year you intend to retire.
- Its stock/bond allocation will be what the mutual fund company thinks is the appropriate mix for someone with that much time until retirement, and that allocation is automatically made more conservative over time.
- Target-date funds aren’t perfect, but they get a lot of the big picture decisions right.
- If you prefer a more hands-on approach, you could do your own research and:
- choose index funds to build a portfolio that reflects your optimal asset allocation.
- Or, you could subscribe to an investment newsletter, some of which cost far less than the fees charged by financial planners.
- Investment newsletters usually offer a number of different strategies and then tell you what to invest in. You’re still a do-it-yourself investor.
- You maintain your own account and make your own trades, but you follow the investing process outlined by the newsletter…
5. Understand the terrain ahead
One of the most important roles a financial adviser plays is seen during market downturns. That’s when the best become therapists, speaking calm words of wisdom into the lives of frightened clients. You could serve the same role for yourself with a little understanding of how the market works.
- If you hear that the market turned in a great performance in a certain year, it’s easy to make the mistake of assuming this wonderful result came about through a smooth, yearlong, upward ride. It doesn’t usually work that way.
- Expecting some turbulence can help calm your fears and keep you from selling when the market gets wobbly…
Taking all of the steps above will get you headed in the right direction. You have a plan. Now put your plan into action and stay with it. The longer you invest, the more confidence you’ll gain and the more comfortable you’ll become at being a do-it-yourself investor.
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