Golden Rules of Investing
When it comes to managing your money, investing is a key part of building wealth. The problem? It can seem difficult to get started or feel tough to keep going. Following some simple golden rules of investing can help you stay on the right track.
The key to building wealth is to start investing early
1. Start early
The key to building wealth is to start investing early. The most powerful ingredient when it comes to investing is time. Through the power of compound interest, your investments can grow and your money can be put to work. If you feel behind with investing, don't get discouraged. Remember, “The best time to plant a tree is twenty years ago, the second best time is now."
2. Be consistent
One of the most important investment strategies is to be consistent. You want to put money aside for your future every month and make it a habit. To make the process simple, set up automatic contributions every time you get paid so you don't have to think about it.
Investing comes with inherent risk but there are ways you can be proactive to protect yourself. The key component is to diversify your investments. You've probably heard the saying, “Don't put all your eggs in one basket" — the same is true for your investments. You want your asset allocation — or how much funds you have in each investment vehicle such as stocks, bonds, and cash — to create a healthy mix, so you can get the gains you want, while also lowering your overall risk.
One of the golden rules of investing is to have a well and properly diversified portfolio. To do that, you want to have different kinds of investments that will typically perform differently over time, which can help strengthen your overall portfolio and reduce overall risk.
The markets are always changing and so are your investments. You'll be investing for many years, so it's important to do regular check-ins to stay on top of your money. Sometimes your original asset allocation can get out of balance, so you'll need to rebalance. For example, the stock market may swing in various directions, effectively shifting the percentages of your investments. You want to work toward maintaining the percentage of stocks and bonds that will help you reach your goals. If you don't take any action, with market fluctuations you could have a lot more of one asset class than another.
As part of the rebalancing process, you buy or sell certain investments in order to get back to your desired asset allocation. This can help prevent your portfolio from becoming too aggressive, when the goal is to minimize your risk. Additionally, through rebalancing you'll avoid having too much in a particular asset class and restore your portfolio back to your original asset mix.
5. Stay the course
There's one big truth to investing: the market will always be in-flux. Don't let that scare you, though. This fear can lead to selling your investments in a time of fear, rather than stay the course. Your ultimate goal is to build wealth, so it's key to keep your emotions out of the process. Adopting a 'buy and hold' strategy where you stay the course and don't touch your money until retirement can help you ride out the market, regardless of what happens.
6. Change it up
You'll likely be investing for decades and you and your financial situation won't be the same during that time. Any time there are big life changes — marriage, divorce, kids, moving, job loss, income increase/decrease — it's time to change it up and make sure your investments reflect your new financial situation. On top of that, your risk tolerance shifts as you get closer to retirement age. Keeping an eye on your investments and changing it up as necessary can keep your money in good shape.
7. Check in with your advisor
If you have a financial advisor or financial professional in your life, check in with them regularly about your investments. Your financial advisor can be your guide and help you get where you need to go. Don't be afraid to reach out and check in, especially if you have any questions or concerns.
The bottom line
If you're wondering how to invest, use these golden rules of investing to get started. Using these simple investment strategies you can put your money to work and take care of your future.