8 Timeless Tips to Keep Your Investments on Track
- Keep It Simple – Don’t invest in anything that you don’t understand. Most investments aren’t that complicated. Be very cautious if you are considering an investment with pages and pages of difficult to understand legal verbiage. You can bet the small print wasn’t added for your benefit.
- Pigs Get Fat, Hogs Get Slaughtered – The biggest risk to sensible investing is fear and greed. If it sounds too good to be true, it probably is. Don’t fall for offers with exceptionally high returns. If someone promises you a return significantly higher than the market rate, there’s a catch. It’s either a scam or there are huge risks involved. Perform some due diligence to understand why the returns are higher than normal.
- Keep Your Emotions in Check – Establish and stick to an allocation that meets your timeframe and risk tolerance. The stock market will rise and fall. Don’t fall into the trap of panic selling when the market falls, only to turn around and buy when the market’s back on top. You don’t make much money selling low and buying high.
- Diversify, Diversify, Diversify – At a minimum, your net worth should reflect a combination of stock mutual funds, fixed income investments, and real estate. You should hold a large number of different investments within each category. For example, your stock portfolio should be comprised of small, medium, and large companies in a variety of different industries in the U.S. and abroad. A diversified portfolio provides a buffer against volatility. Each category responds differently to changing economic and political conditions.
- Invest Based on When Money is Needed – Maximize your risk/return ratio by designing a portfolio that supports your investment time horizon. Generally, money needed in the short term should be invested in safe, less volatile investments. Your return may be limited, but your principal will be safe. With long term money, you can take more risk and potentially earn a higher return. With a longer time horizon you can ride out the fluctuations in the stock market.
- Be Tax Smart – Consider tax consequences when buying and selling investments, and maximize your contributions to tax advantaged retirement plans. Within taxable accounts, municipal bonds and mutual funds with a low turnover ratio are good options. Also, watch for opportunities to harvest tax losses.
- Avoid High Fees, Commissions and Surrender Charges – High fees, commissions, and surrender charges can eat into your return and limit your flexibility. Review prospectuses and investment reports to fully understand the fees and penalties associated with the funds or products you are considering.
- Stocks Don’t Have Memories – Don’t keep a poor performing security with hopes it will return to its original purchase price. Stock and stock mutual funds should be evaluated based their future potential. There is no correlation between the current value of a stock and what you paid for it.