5 Tips for Successful Investing, from myFICO
It seems like there’s never a shortage of slick financial “gurus” who claim they’ve just discovered a foolproof investing method that’s guaranteed to provide high returns with no risk. But if someone tries to get inside your pocketbook by making those kinds of promises, you’d better run the other way, warn the financial experts at myFICO.
The truth is that there’s no such thing as a risk-free investment. And while the mechanics and tools that you use to invest may change over time, most of the bedrock principles of how to succeed at investing will never change.
So if you’re looking for a list of stock picks, this isn’t the article for you. But you’ve come to the right place if you want strategic advice on how to develop your overall investing plan.
Below, myFICO will break down five time-proven investing tips that can help you reach your goals.
Start Investing as Soon as You Can
People often worry that the stock market might crash right after they begin investing (especially if it’s been rising for a long period of time as it has throughout 2020 and 2021). And this concern can keep them on the investing sidelines.
But studies show that time in the market is really what you want to aim for as an investor rather than perfect timing. For example, Capital Group found that even if you had invested $10,000 in the S&P 500 on the worst (highest) day each year from 1998-2018, you’d still have more than doubled your money over the 20-year period.
That study assumed, however, that you avoided the urge to pull your money out during market downturns. The longer your money stays invested, the better chance you have of earning a positive return. The Capital Group study found that the market has gone down about 27% of the time over one-year spans and 17% of the time in three-year periods.
But as you extend your timeframe, the likelihood of earning a positive return just keeps going up. The Capital Group study found that you have an 84% chance of making money in the stock market if you keep it invested for at least five years. And over a 10-year period, your odds of success jump up to 94%.
This data shows that, as a general rule, it’s always a good time to invest. But it might not be the right time for you. For example, if you’re still trying to pay off high-interest credit card debt or to build up your emergency fund, you might want to reach those financial goals before starting your investment journey.
Decide if You Want Help (And How Much)
Some people feel totally comfortable with opening an account at a stockbroker and self-picking all of their investments. And that’s great.
But others would like a little assistance, and that’s perfectly fine too. There are a variety of ways that you can get professional investing help.
If you’re just looking for someone to help you build your investing plan, you might want to schedule a one-time sit down with a fee-only financial advisor. Or, if you want a completely hands-off experience, you can pay an advisor an ongoing fee to manage your investments for you.
Robo-advisors, which use computer algorithms to manage investments, have also gained in popularity as lower-cost wealth management options. Many of the top robo-advisors offer automatic rebalancing and tax-loss harvesting while charging a fraction of what a human advisor would charge (often starting at around 0.25%).
Diversify Your Investments
Diversification is spreading out your investments so that you don’t have “all of your eggs in one basket.” Building a properly diversified portfolio can reduce both risk and volatility.
It’s important to diversify both across asset classes and within them. Diversifying across asset classes means that your portfolio goes beyond just investing in U.S. stocks to include other assets such as bonds, international stocks, cash commodities, real estate, and other alternative investments.
But even within an asset class, such as U.S. stocks, you’ll want to be mindful of your level of diversification. For example, owning shares of Southwest Airlines, Carnival, and Hilton Hotels is more diversified than just owning one of these companies. But if the travel industry, as a whole, takes a hit (as it has during the pandemic), each of these stocks may underperform.
For this reason, it’s important to make sure that a variety of industry sectors are represented in your portfolio. A few of the most common sectors include technology, healthcare, industrials, energy, consumer staples, and more.
It’s easy to diversify your stock investments using funds (mutual funds or ETFs). Certain funds are actively managed while others track market indexes such as the S&P 500. Some brokers also allow clients to buy fractional shares, which makes it easy to invest in many stocks or ETFs with minimal capital.
Know Your Investing Goals and Deadlines
When will you need to access the funds from your investments? And what is the target value of your portfolio at that time? These are important questions to ask and answer at the outset of your investing journey.
Knowing your investing goals can keep you from panicking during times of high volatility. And it could encourage you to increase your contributions if you’ve fallen behind.
As you get closer to your goal deadline, you may also want to gradually shift into a more conservative allocation of assets (i.e., more bonds and fewer stocks). A good rule of thumb is to subtract your age from 110 to 120 to calculate how much of your portfolio should be in stocks.
If you decided to subtract your age from 110, you’d want to have 90% of your portfolio in stocks and 10% in bonds at age 20 (110-20 = 90). But, by age 60, you’d want to have a 50/50 stocks-to-bonds ratio (110-60 = 50).
If you don’t want to manually make these adjustments, you can invest in a target-date mutual fund which will become more conservative as your target date nears. Robo-advisors will also automatically adjust your asset allocation throughout the life of your goal.
Reduce Your Taxes and Fees
If you’re investing for retirement, it’s important to take advantage of any tax-sheltered accounts that are available to you. If you have access to a 401(k) plan, that might be a great place to start (especially if your employer offers a matching contribution). And if you’re self-employed, you may want to consider opening a SEP or SIMPLE IRA or a Solo 401(k).
If none of these employment-based plans are available to you, you can still open an individual IRA (traditional or Roth). With a traditional IRA, taxes on your contributions are deferred until the money is withdrawn. With a Roth IRA, meanwhile, you pay taxes on the money now so that you can have tax-free withdrawals in retirement.
Do you think that your annual income will be higher in retirement than it is today? If so, then you may be better off choosing a Roth IRA and paying taxes on your income now. But if you suspect that your income will be lower in retirement, deferring your taxes by contributing to a traditional IRA could be the better choice.
In addition to minimizing your portfolio’s tax drag, you’ll also want to pay attention to the underlying cost of your investments. You can check the expense ratio of a mutual fund or ETF to see how much of its assets are being used to cover expenses. Note that passively-managed index funds often have lower expense ratios than actively-managed funds.
The Bottom Line
No one knows how any particular investment will perform tomorrow, next month, or next year. But we do know that the market, as a whole, tends to go up over time and that a well-diversified portfolio is less risky than one that’s invested in just one or two assets.
We also know that if two investors earn the same rate of return on their investments, the one who pays less in taxes and fees will come out ahead.
Are these earth-shattering or complicated ideas? No. But if you’ll allow them to guide your investing decisions, you’ll be more likely to achieve success over the long haul.
For more loan and credit education, visit myFICO’s blog at https://www.myfico.com/credit-education/blog
Copyright Today’s Credit Unions