A successful investor maximizes gain and minimizes loss. Though there can be no guarantee that any investment strategy will be successful, and all investing involves risk, here are some basic principles we utilize that may help you invest more successfully.
Long-term compounding can help your investments grow: It's the "rolling snowball" effect. Put simply, compounding pays you earnings on top of your reinvested earnings. The longer you leave your money at work for you, the more exciting the numbers get. While you should review your portfolio on a regular basis, the point is that money left in an investment offers the potential of a significant return over time. With time on your side, you don't have to swing for investment "home runs" in order to be successful.
Endure short-term pain for long-term gain: Riding out market volatility sounds simple, doesn't it? But what if you've invested in the stock market and it drops like a rock one day? On paper, you've lost value, making it tough to stay the course. There's no denying it--the financial marketplace can be volatile. Still, it's important to remember two things:
The longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain. Though past performance doesn't guarantee future results, stock prices have advanced higher over the long term. Take your time horizon into account when establishing your investment game plan. For assets you'll use soon, use conservative investments designed to protect your principal. Conversely, invest more aggressively for goals that are many years away.
During any given period of market turmoil, some asset categories historically have been less volatile than others. Bond price, for example, have generally been less dramatic than stock prices. Though diversification alone cannot guarantee a profit or ensure against the possibility of loss, you can reduce your risk by diversifying among various asset classes.
Consider liquidity in your investments: Liquidity needs should affect your investment choices. If you'll need the money within the next one to three years, consider savings accounts (which are insured by the FDIC), or short-term bonds and money market funds (which are neither insured or guaranteed). Your rate of return will likely be lower than riskier investments, but you'll breathe easier knowing that the principal is protected and quickly available.
Review your investments: Unless you plan to rely on luck, your portfolio's long-term success will depend on a periodic review process. There are several reasons to review your plan. Maybe your hot stock tip has frozen over. Maybe economic conditions have changed the prospects for a particular investment, or an entire asset class. As you go through life, and your circumstances change, your asset allocation will need to reflect those changes.
Finally, taking these steps can help manage the volatility you experience, help you grow assets over the long term. However, they are no substitute for a comprehensive investment plan. For the best investment outcome, you should seek the counsel of an experienced, well-trained, investment professional like The Clarus Group, LLC.