From the conservative saver to the aggressive risk-taker, most people agree that a smart, long-term financial plan needs ways to make money grow. Like most financial choices, there's no single best way to do that. If you want to become a seasoned investor, you must learn to get to know yourself, including your goals, motivations, fears, and limits. Once you have a grasp of those, you can begin to see how they mesh with the basic rules of investing.
Get a Handle on the Basics
The investing world is filled with vast amounts of complex terms and concepts. From types of investments, like stocks and bonds, to investment styles, such as passive and active, there's no shortage of terms to learn. The good news is that 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, keep your loved ones financially safe and comfortable, and ensure that 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 young people. Only 31% of Americans younger than 30 years old own stocks.
According to a 2019 Gallup poll, 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 people have only seen the effects of one major downturn, the Great Recession. Older investors, on the other hand, have gone through ups and downs before, so more of them have stuck with investing in the market. This approach seems to have paid off.
If you have ever dealt with volatility as you invest, you may find that it's easier to ignore the fluctuations and focus on the long-term goal. Taking the time to learn about how the market works in the long term can help calm the fear that many investors or would-be investors suffer when they're feeling panic at price dips, or even when trying to make financial decisions in a broader sense.
Panic selling occurs when so many investors sell their holdings at once that the market as a whole is affected. Prices naturally drop after that happens, and there are many types of investors who know how to capitalize on such moments.
Form a Strategy
The next step involves setting some goals, and using what you've learned to make plans for reaching them. This process will differ for each person, 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 new tactics. Don't skip over learning an investment approach just because you think it might not apply to you right now.
You may first start out by focusing on value investing, which involves finding stocks that are underpriced by the market. This approach can give you good hands-on practice with research and learning about how to find and value stocks. Later, as you grow older perhaps, or have less time to spend, you may decide that you need your portfolio to generate more passive income. You could also take the opposite route, thinking you want to be a passive investor who takes a hands-off approach but later find that you'd like to become more active in your practice. Whatever the case, leave room to change and adjust as you learn.
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 investment choices, you still need to assess 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: Chances are, you'll have to weather downturns at some point, and what works for you at age 30 might not make sense when you're 60.
When building a portfolio, your time horizon, or the amount of time you have to reach your goal, will shrink. For that reason, most experts advise adjusting your portfolio to become more conservative over time.
Take Advantage of Compound Returns
One of the most important things you can do as an investor is to start early. Time can be a major asset, mainly on account of compounding, which is how you earn returns on your returns. To explain, let's look at an example. Suppose you invest $1,000 in an interest-bearing growth fund. You add $100 monthly and earn 10% compounded annually until you turn 60 years old. The amount you make over time will grow based on how much you have put into the account, of course, but the real growth occurs when you're making money off a larger and larger amount. Here's how much you would have made if you had started at the following ages:
- 25 years old: $353,331.68
- 35 years old: $128,851.18
- 45 years old: $42,304.23
As you can see, time is on your side. The best way to take advantage of it is to start early, even to invest a modest amount, and to learn as you go.