A penny saved is a penny earned, right? Savings is important piece of your financial wellbeing, but to really maximize your moneyâ€”or even just keep pace with inflationâ€”you also need to invest.
During periods of stock market volatility, though, investing can be difficult to embrace. Understanding the basic history of the stock market, as well as different investment strategies can help boost your peace of mind as you look to invest even during periods of market volatility.
What Investors Should Keep in Mind
Though some people choose not to invest because they feel itâ€™s a gamble, the real scoop is itâ€™s not the same. Investing is about creating wealth through the economy. It is important to remember the stock market has historically trended up. That is not to say that there were not bear markets, like the Great Depression and the Great Recession, or that we will not face bear markets in the future. But in taking the long view, the market has always recovered.
Timing the market is incredibly difficult and has caused much grief for many investors who have attempted it. Instead, understanding that there will always be periods of ups and downs and setting up an investment strategy that will help you withstand periods of volatility is key.
Investment Strategies for the Long Run
For most individuals, investing is a long-term strategy. It can be nerve-wracking to wade into the investment waters for the first time, especially during periods of stock market volatility. Following these investment principles can help you get started.
- Educate yourself. A good rule of thumb is to invest in what you understand. That doesnâ€™t mean you should leave your money in a savings account. Instead, it means you need to take small steps to learn more about investing to build your comfort level. Explore target-date retirement funds or look into robo-investment apps that make getting started less overwhelming.
- Start early. Many people think investing is something that canâ€™t be done until you have earned a lot of money. The most successful investors are the ones who start early and invest consistently. This allows time to do the heavy lifting through the power of compounding. Someone who invests $50,000 in the market by the their 35th birthday and stops adding to their investments is likely to end up with over $1,000,000 by 65. Someone who invests $200,000 from ages 35-65 will only have $540,000 by 65. Making up for lost time isnâ€™t impossible, but it is more difficult.
- Understand emotions. Conventional wisdom suggests taking the emotion out of investing. Unfortunately, human nature might make that impossible to do entirely. Instead, be honest with yourself and invest according to the risk level you can tolerate. Your goal is to keep your money in the market for as long as possible, avoiding the impulse to pull it out if and when the market dips.
- Diversify. Someone who is planning to be in the market for several decades should set up a diverse investment strategy. This prevents you from putting all of your eggs in one basket. Using index funds or ETFs spreads your investments out. Investing in U.S. and foreign stocks is beneficial during periods where domestic and foreign market upturns and downturns are not simultaneous. You may also want to consider adding bond index funds and even real estate investment, through properties of your own or through REITs.
Investment Strategies in the Short Term
While you may have started investing by playing the long game, what happens when your investing timeline is significantly shorter? As someone nearing retirement age or in retirement, you will likely begin to draw down your investments. Using these investing strategies can help you maximize your returns while minimizing risk.
- Follow the rule. The Four Percent Rule is commonly held as a safe retirement strategy. Essentially, a retiree could draw down their portfolio by 4 percent each yearâ€”likely through interest and dividendsâ€”and the portfolio would still sustain itself in any market condition. Even if you plan to follow the Four Percent Rule, understanding extra costsâ€”like the cost of healthcare in retirement and planning for long-term careâ€”is essential.
- Minimize risk. As someone who is facing a shorter timeline on investments, you may want to reconsider your allocations. Reducing your stock market exposure can shield you from stock market volatility. This might mean selling individual stocks or moving from stock ETFs to bond ETFs. Diversifying your investments in multiple stocks across multiple industries is important. You may also consider creating municipal bond portfolios or purchasing annuities.
- Keep an eye on fees. Fees can eat away at investments quickly, especially in retirement when you do not have any income coming in. Calculations have shown that retirees who reduce the fees of their investments could see an extra $10,000 more income per year. It is imperative that you ask about expense ratios, advisory fees, brokerage account fees, sales loads, and any other fees your investment accounts might incur.
Investing With Confidence
While many dream of a lifetime of investment gains, the reality is there will always be periods of loss. By maintaining a long-term perspective and focusing on the fact that the market trends up throughout history, investors will find strategies that work for them. Someone who is investing in the long run during periods of volatility should focus on educating themselves, investing as early as possible, reducing emotions and diversifying investments. Someone who is working with a shorter timeline should be strategic with withdrawals, reduce their risk, and minimize fees. These strategies can help any investor feel more confident when faced with a bull or a bear market.
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