From the conservative saver to the aggressive speculator, most people agree that a smart, long-term financial plan requires finding ways to make money grow. Like most financial decisions, however, there's no single best way to do that. Becoming a seasoned investor means getting to know yourself—your goals, motivations, fears, and limits. Once you have a grasp of those, you can begin to see how they mesh with the fundamentals of investing.
Get a Handle on the Basics
The investing world is filled with vast amounts of terminology. From types of investments, like stocks and bonds, to investment styles, such as passive and active, there's no shortage of terms to familiarize yourself with. You don't need to be an expert in all these concepts to become a good investor. Waiting until you feel like you "know enough" to invest could keep you on the sidelines, missing out on potential gains because of fear or indecisiveness.
The stock market is a great way to grow your wealth, put your family in a comfortable financial position, and ensure you don't outlive your retirement money. However, only 55% of Americans own stocks, which is down from the 62% who did before the 2008 financial crisis. These figures are even lower among younger populations—only 31% of Americans younger than 30 years old own stocks.
Both younger and older investors view stocks as the second-best long-term investment after real estate, but only one group heavily invests in them. Fear isn't the only driving factor behind those numbers, but it can explain a lot. Young Americans have only seen the effects of one major downturn, the Great Recession, but older investors have gone through ups and downs before, so more of them have stuck with investing in the market. An approach that has appeared to pay off.
If you have experience dealing with the volatility of investments, it's easier to ignore the fluctuations and focus on the long-term goal. Taking the time to educate yourself can help alleviate the fear that many investors or would-be investors feel when trying to make financial decisions.
Form a Strategy
The next step involves setting some goals and using what you've learned to make plans for reaching those goals. This will look different for everyone, and as important as it can be to follow the age-old investment advice of "stay the course," that doesn't mean you can't ever change your mind. As your goals change and you learn more about what works well for you, you might shift gears and try different tactics. Don't skip over learning an investment approach just because you think you might not be interested in it right now.
You may start focusing on value investing—which involves finding stocks that are underpriced by the market—but later decide that you need your portfolio to generate you more passive income. You could also begin thinking you want to be a passive investor who takes a hands-off approach but later find that you're interested in becoming active in your practice. Whatever the case, leave room for change and adjustments.
Learn to Adapt
Overconfidence can be just as damaging to your portfolio as fear. Even if you want to take a less active role in your investments, you still need to evaluate your plan's effectiveness from time to time. As you work through this guide to investments and strategies, don't forget about the big picture: You'll have to weather downturns at some point, and what works for you at age 30 won't necessarily make sense when you're 60.
Take Advantage of Compound Interest
One of the most important things you can do as an investor is start early and give yourself time to take advantage of compound interest, which is when you begin earning interest on your interest. For perspective, imagine that you make an initial $1,000 investment, contribute $100 monthly, and earn 10% annually until you turn 60 years old. Here's how much you would have accumulated if you started at the following ages:
- 25 years old: $353,331.68
- 35 years old: $128,851.18
- 45 years old: $42,304.23
Time is on your side; take advantage of it.
Gallup. "What Percentage of Americans Owns Stock?" Accessed May 24, 2020.
Gallup. "U.S. Stock Ownership Down Among All but Older, Higher-Income." Accessed May 24, 2020.