By Brian Spinelli, CFP®, AIF® as featured in Kiplinger
The investing world can be overwhelming and complex, but keeping your eye on your goals, timing and expectations can help make it easier to succeed.
In the spirit of National Financial Awareness Day (Aug. 14) and broadly helping to contribute to improved financial knowledge, this article will address different investing strategies. If you haven’t already done so this year, this day serves as a good calendar reminder to take a look at your financial practices.
If you’re new to investing, it can seem overwhelming and leave many wondering where to start. You may hear about friends buying shares of stock or trying to buy a rental property or hear about employer retirement plans at work. Then you go looking and realize the number of options out there seem endless. How do you even choose?
Read on for some tips for navigating the complex world of investing.
Begin with an end in mind
Before you consider investing money, you need to develop a strategy that is tied to a goal or set of goals. Part of developing goals is also setting out a time frame to try to achieve them. For example, if someone in their 20s wants to buy a home in five years, that is a different goal than someone of a similar age trying to save enough to retire at age 50. While both are great financial goals, they should come with different investment strategies.
Setting the time frame is important. While you may hear instances where investments make people a lot of money quickly, those generally are outliers. Most investors build their wealth over time with discipline and saving. If you have financial goals that are short term, say, under three years, you might need to use a strategy that involves taking some risk and potentially losing money.
While this strategy does not usually yield high returns on your money, it does generally ensure that the money is there when you need it. It is very tempting when you hear about people making a lot of money investing to jump in for a short period of time, but the odds of getting the timing just right are very slim. You could be stuck needing the money you saved only to find it’s currently less than what you started with. Time frames matter!
If you are investing in assets like stocks of companies, they can have large price fluctuations in short periods of time. Assuming you are investing broadly, your chances of not making money do generally diminish with longer hold periods beyond five years. So, before you consider any investment strategy, start by defining a time frame for the money in question.
Understanding expectations and your behavior
Along with the time frame, also consider your expectations and behavior. When choosing an investment strategy, it’s highly likely you will encounter tough periods over time, especially if it’s a long investment time period. If you are ever putting money at risk for a higher return than you can get on a high-yield savings account, you need to be prepared for periods where your value may go down.
It isn’t out of the ordinary to have broad stock markets go down 20% in a short period of time, as an example. Generally, they recover with time, and it is important to assess how you would react when faced with a market downturn. Would you feel compelled to jump ship? Would it give you stress and anxiety? If you think you will not be able to ride it out, then that might not be your sole strategy to pursue.
With more than 7,000 registered mutual funds and nearly 3,000 exchange-traded funds (ETFs) in the U.S., according to the Investment Company Institute, I understand why it can be daunting to figure out an investing strategy. Those are generally easier-to-access investment vehicles and don’t include buying single stocks or bonds outside of one of these pooled investments. Your strategy needs to be appropriate for the time frame, goals and your ability to stick with it when markets are having a tough period.