Sometimes following the stock market is akin to watching the thrill rides at an amusement park. While many people can stomach the ride, others can't bear to watch. Knowing what type of investor you are and understanding how to manage your investment mix will help you stay the course.
Throughout its history, the market has had its ups and downs, but it's also been a proven way to build wealth. According to the experts, investors should expect to enjoy an average annual return from 4% to 6%1. And while investing does involve risk, and past performance is no guarantee of future results, you'll discover that your portfolio can weather the market's dips as well as take advantage of upswings, so it's important to keep a long-term perspective.
Here are some strategies to help you manage your investments wisely.
Focus on the Long Term
If you're newer to investing, there's no perfect time to get in the market. The earlier you begin, the more time your money has to grow. That's because of the power of compounding growth. As you contribute regularly to your investment portfolio, your money will grow and over time there will be the opportunity for growth on that growth. Once this momentum starts, your investment has the potential to snowball.
Over time, as your income increases, you can consider contributing more to your investments. You'll also want to establish important financial goals such as buying a home, saving for higher education or retirement. A SchoolsFirst FCU financial advisor can help you review your options and develop a manageable action plan and meet with you at least annually to review it.
Asset Allocation Matters
A portfolio is simply an allocation of investments — such as stocks, bonds, and cash. Your financial advisor can help you determine what's right for you, based on your financial goals, your time to invest, as well as your tolerance for risk. For instance, if you're young and saving for retirement, you might want to be more aggressive, because you have a longer investment time horizon. On the other hand, if you're closer to retirement, you may want to be more conservative in your approach.
Because asset classes behave differently, having the proper allocation will help you manage the degree of risk in your portfolio. For instance, stocks have historically had the highest average returns among the three asset classes, but also come with more relative risk, while bonds tend to be less risky, but the returns aren't as dramatic. Cash or cash equivalents such as share certificates, money market accounts or treasury bills while safe, tend to offer the lowest long-term returns.
The key is to diversify your investments with a healthy mix of asset classes so you can enjoy market gains with a more managed level of risk. Therefore, if you have a longer-term goal in mind, you can afford to take on more relative risk as you are in a better position to ride out stock market downturns; a shorter-term goal should focus on a more cautious approach. It is important to review your portfolio annually at a minimum; over time what were once considered long-term financial goals will become shorter term and may warrant changes in your investment allocation. Reallocations should also be considered if your financial goals change.
Forget Market Timing
If you own stocks and the market drops, it's human nature to want to do something, anything. Unfortunately, many times people do exactly the wrong thing, and pull their money out (locking in lower values), sit on the sidelines and try to figure out the optimal time to start investing again. But unless you have a crystal ball it's almost impossible to determine the right time to get out of the market and when to dive back in. Most experts agree that for most people, it's not worth the risk and frustration to try timing the stock market. Stick with stocks for the long-term financial goals of your investment plan.
- Source: Ibbotson SBBI Stocks, Bonds, Bills and Inflation 1926-2022