Basic Investment Points To Keep In Mind!
When the stock market fluctuates, no one can blame you for feeling a little apprehensive about investing. Sometimes you wonder if anything is safe, so how do you invest your savings? You invest by maintaining realistic expectations and keeping some basics in mind:
Diversify your portfolio. The most important lesson to learn from stock market ups and downs is that it is risky to invest 100 percent of your portfolio in one asset class. Make sure you diversify at least among stocks, bonds, and cash, and give serious thought to diversifying in other asset classes, such as real estate. That way, if one asset class declines, another category may be rising or not decreasing as much, so the effects of the decline will be less dramatic. To guide your investing decisions, develop an asset allocation strategy you are comfortable with and can maintain during both good and bad times.
Rebalance at least annually. You can’t just develop an asset allocation strategy and then leave your portfolio on autopilot. Since different assets have differing rates of return, your allocation will get out of balance over time. For instance, when the stock market goes through a decline, lower stock prices mean many portfolios contain a higher percentage of bonds than was intended. When your allocation is off by 5 to 10 percent, take steps to get it back in line. That can be a difficult concept to implement, because you are essentially selling investments with good performance to purchase investments with lower performance. Just remember you are following a basic investment concept? You are selling high and buying low.
Save more of your income. If the stock market dips, are you concerned future returns may not be as high as they have been in the past, making it more difficult to achieve your financial goals? The answer is simple but requires discipline? Save more of your income. Take a serious look at your lifestyle and spending choices, trying to find ways to reduce expenditures. Sure it’s more fun to live a richer lifestyle, but is it worth jeopardizing your retirement?
Invest gradually. Is the stock market going up or down? Should you invest now or wait to see what happens? The stock market’s future direction is never clear, making investment decisions difficult. Instead, put your investing program on autopilot. Set up a dollar cost averaging program, investing a certain dollar amount every week or month. This will spread your purchases out over time, so you won’t make one major purchase at a market high. Keep in mind, however, that dollar cost averaging does not assure a profit or protect against losses in declining markets. Before starting, consider your ability to continue purchases during periods of low price levels.
Avoid taxes. At rates ranging from 10 to 35 percent, income taxes can dramatically reduce your portfolio. Even capital gains taxes, with a maximum rate of 15 percent, can take a large chunk out of your portfolio. While you don’t want to make investment decisions solely for tax purposes, there are a variety of investment vehicles that can lessen the impact of taxes. If you’re saving for retirement, investigate options like 401(k) plans and individual retirement accounts. If you are in a high tax bracket, consider municipal bonds for your portfolio’s bond portion.
Keep time on your side. During a time of low returns, it can be painful to review your stock investments, but you should only be invested in stocks if you have a long time horizon. While no one can accurately predict what the stock market will do tomorrow, history has shown over long time periods, it tends to go up. Follow the other five points and keep time on your side
