Investments can be a stepping stone to wealth. With the right investment strategy, you can grow your wealth significantly and be financially secure for life. However, investing is not all that simple. Investing strategies can vary based on your risk appetite, your capacity to invest, your personal and professional financial goals, and your family’s needs. It can also depend on your wealth, age, income, and the prevailing market situation at the time you are investing. Taking all of these factors into consideration while planning your investments can help you determine the most suitable investment strategy for your needs.
Investments are unpredictable. Sometimes, things may not go as planned. An unexpected political or global event can impact the market and, in turn, affect your investment returns. For instance, the 2020 Coronavirus pandemic caused havoc around the world, bringing a significant drop in the stock market. But, it is during times like these that the importance of incorporating certain investment principles becomes paramount. By making the following principles a part of your investment strategy, you can keep your portfolio immune from most uncertainties and ensure that your money is safe. Following these investment principles will help you preserve your invested capital and help your investments grow in value.
Here are 5 Important principles to incorporate in your investment strategy:
1) Start investing early
The sooner you start investing, the better it can be for your future. A longer timeline can offer many benefits. Firstly, it improves your returns as your invested capital has a longer timeframe to garner returns. Using the power of compounding, you can earn high profits until your investment matures. This also helps you beat inflation. Secondly, the long timeline ensures that you have enough reaction time to recover from losses. Since the market is cyclic and a market drop is always followed by a market boom, you are likely to make up for the lost money soon enough as long as you are not in a hurry to cash in or liquidate your funds. Staying invested for a longer-term also ensures that you do not miss out on market opportunities that can benefit you. Thirdly, starting to invest early lets you invest in smaller quantities, thereby reducing the burden on your shoulders. A lot of people make the mistake of not investing early in their lives as they feel they do not earn enough yet and that a small investment will not make a difference to their financial standing in the long run. However, investing early, even in small quantities, can help you create a sizable fund in the end. Investing ensures your money is not sitting idle and is instead working to increase in value. Additionally, investing early can also help you in the long run as you may not have to make drastic lifestyle changes at a later stage in your life to make up for lost time.
2) Diversify your portfolio as much as necessary:
Portfolio diversification refers to distributing your money across industries and investment types to ultimately ensure that you do not concentrate risk in one product. For instance, investing only in real estate can hamper your money’s growth. This is because while real estate investment can offer good returns, it may not always be financially secure. Liquidating real estate can be tough, especially when the market is low. So, if you need money for a financial emergency at a time when real estate prices are going through a lull, you may be forced to sell a property at a loss. However, if you have stocks, bonds, real estate, gold, etc. in your investment portfolio, you will have something to bank on in times of an urgent financial need. Similarly, investing all your funds in the airline industry will most likely restrict your growth. But, keeping a mix of technology, health care, consumer staples, etc. will ensure that when one industry does not perform well, the other industries may make up for it. Since no two investments react in the same manner to the market, diversification can help protect your money. Diversification not only reduces risk but also limits volatility. It also opens doors to varied industries and markets, increasing the scope of making profits and capping on the right opportunities.
However, the required level of diversification can differ for each individual, depending on your age, income, future needs, risk appetite, etc. Some investors believe that the more they diversify, the higher profits they can earn. But that may not always be true. Over-diversification can be as bad as under diversification and ultimately render the strategy useless. Hence, it is important to find the right balance. If you are unsure of whether your current portfolio is well-diversified, you can use the services of a professional financial advisor for guidance and recommendations.
3) Reduce risk in your portfolio as you age
The level of risk you can take with your investment is, in many ways, directly proportional to your age. When you are young, you have fewer responsibilities and a long time ahead of you to save for your retirement and old age. This stage in your life allows you to take risks, try newer investments, and implement fresh strategies to earn high returns. However, as you grow old, your responsibilities increase and the time left to retire decreases. You also start to fend for others apart from yourself, such as a spouse or a child. For example, higher education costs of your children are one of the most significant expenses that you are likely to come across in life, one that could reduce your ability to take a risk. Therefore, as you age, it is also recommended to de-risk your investment portfolio.
4) Plan for all your financial needs
Being focused only on the future and neglecting your present or vice versa can lead to frustrations, disappointments, and financial anxiety. Hence, it is important to plan well in advance and balance out your needs accordingly. Many people adopt extremely frugal ways in the present just to amass a lot of wealth for their future. However, they end up living unhappy lives. A larger than needed corpus in retirement can also seem like a waste if you are not able to use it for yourself. Passing it on to your future generations can be a great idea, but, if you are doing this at the cost of your happiness, you are likely to end up bitter. Likewise, if you solely concentrate on your present financial needs and disregard your future, you will struggle to sustain yourself financially in your old age. A lack of proper funds in retirement can result in poor access to healthcare, increased dependency on your children, and general discontentment.
The optimal way to plan your investments is to strike a balance and aim for an equilibrium. This can be done with a financial plan that bifurcates all your needs so you can save and invest for them all in equal measures. A financial plan ensures that you are able to enjoy the present and also secure your future financial needs. This way, you do not make hurried or rash decisions. Instead, you can optimally invest, have a good standard of living, and provide for your family members and their requirements, all at the same time.
When you make a financial plan, focus on creating a budget, setting up a savings and investments schedule, minimizing debt, etc. Make sure to save and invest regularly, preferably each month. This will allow you to create good financial habits and discipline that can benefit you for life. Another important thing to keep in mind is to not think of investing as something that you do only on special occasions, such as when you get a bonus or salary hike from work. On the contrary, investing your money should be done based on the income you earn. Your investments should also increase as you excel in your career. Make investing a part of your life for it to work in your favor.
5) Pay attention to all your monetary outflows
Investing is accompanied by varied kinds of expenses. These can range from expense ratios, fund management fees, annual fees, commissions, etc. Taxes can also affect your profits. Hence, it is essential to pay attention to them and pick your investments accordingly. For instance, a Traditional and a Roth Individual Retirement Account (IRA) primarily differ in their tax treatment. Investors generally pick a Traditional IRA if they expect a lower retirement income as the qualified withdrawals from the account are taxed after the age of 59.5, while people who expect a higher income in retirement pick a Roth IRA as the qualified withdrawals are tax-free after the age of 59.5. Picking an investment that results in high tax liabilities or one that comes with high investment costs can be detrimental to your financial plan as it can result in low earnings. Hence, you must check the costs involved before you select a particular investment instrument.
A financial advisor can also add to your expenses. All of these expenses determine the value of your returns. However, not all expenses are bad. While it may seem like paying a financial advisor is a huge expense, selecting a well-experienced financial advisor can bring you higher rewards that make the investment worth it. In such a case, the financial advisor’s fee is merely a small price to pay for a financially secured future. Hence, it is important to assess your potential expenses to see how they impact you in the long run and if they are worth spending on in the present.
To summarize
Every investor is likely to have a different investment strategy. But, the points mentioned above can help all investors in some capacity. These principles have been tested time and again and are recommended to help you maximize the returns from your investments. They ensure that you can earn profits while enjoying the journey and not being bogged down by uncertainty, stress, or disappointments. Try to incorporate these investment strategies into your financial plan so you may look forward to living a comfortable life with adequate funds.
If you need help drafting an investment strategy as per your unique needs, goals, age, and income, you can contact a professional financial advisor to get started.
To further understand how to preserve and grow your investments using these investment principles, visit Dash Investments or email me directly at dash@dashinvestments.com.