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We are often asked, “What can I do to be a better investor?” There are many simple steps that you can take to improve your investment results. Many of these tips are topics which we devote an entire radio show or newspaper article to.
If you would like to have a deeper understanding of any of the keys below, check out our archive of articles at beaconpointe.com or call us at 574-267-6766 to schedule a complimentary consultation.
The first step to becoming a better investor is to understand the difference between saving and investing. Usually saving is for shorter-term, smaller goals like a vacation or a car. Investing is for longer-term goals usually more than five years away, such as retiring or paying for college.
Before you begin investing, it’s important to put the rest of your financial house in order first. Compile a budget, make plans to pay off debt and build your emergency fund. Create a basic financial plan by listing your goals for both the short-term and the long-term. Clarify and prioritize your goals. Make them as specific as possible. For example, “retirement” isn’t a goal, but “retire in 2027 with $3,000 per month in income” is.
Once you have created concrete goals, you can go about the work of achieving them. Smart investing isn’t just chasing the highest returns. This is how people get into trouble like they did during the dot-com bubble of the 1990s. Instead, work backwards from your goal and invest with the least amount of risk possible to achieve the returns you need to meet that goal. Also, understand your own tolerance for risk. If the thought of losing money in your account, even temporarily, is daunting to you, then placing all of your money in stocks is probably not the right move.
All investments carry some amount of risk.
Historically, stocks have outperformed other investments over the long term, but will be subject to volatility. Bonds are less volatile but can still lose value. Take the time to learn the basics of any investments you plan to put in your portfolio.
Keep realistic expectations about the kinds of returns you will be able to generate. Don’t confuse luck with skill. If you happen to start investing at the beginning of a bull market, it is probably unrealistic to expect to achieve those returns over the long term. Stock market returns are strongly mean-reverting, which means they will tend to go back to historical averages. A period of outperforming the average is likely to be followed by a period of underperforming the average.
Follow a written plan. The technical name for this is an “Investment Policy Statement,” but just a sheet of paper with your goals and plans for reaching them will be helpful. This is key to staying on track during rough periods in the market, but it can also help to keep you from taking on too much risk during good market periods.
Your plan should include investment goals and timelines, minimum required returns and the mix of assets you intend to use. Allocate your assets according to this plan. This will help you to avoid being too concentrated in any one asset class, like large company growth, or sector, like healthcare or technology. Don’t overload on any one stock, even your employer’s.
Don’t chase “hot” performance. The top-performing fund or stock or even asset class for one year may not be the best one in future years. Also, don’t ignore “cool” performance. Instead, plan your asset allocation, and rebalance annually, taking profits from top performers and adding to underperforming areas. Most importantly, stick to your plan. Nervous investors often sit on the sidelines during down markets, but they also can miss the recovery. Missing a week or two of a market recovery can cut your returns significantly.
Start investing early. A $10,000 investment earning 8% grows to $21,589 in 10 years, but $100,627 in 30 years. Invest regularly and automatically. Payroll deduction can be an effective way to invest because the money will be set aside before you see it in your bank account.
Rebalancing your portfolio is important, but so is monitoring and revising your investment plan. Whenever you have a major life event, such as a birth, death, marriage or divorce, we believe you should reevaluate your plan. Even if you don’t have a major life event, we recommend reviewing your plan once a year.
To hear the podcast of the Smart Money Management radio show on this topic, or others, visit alderferbergen. com.
Important Disclosure: Mike Bergen is a Partner, Managing Director at Beacon Pointe Advisors, LLC. The information contained in this article is for general informational purposes only. Opinions referenced are as of the publication date and may be modified due to changes in the market or economic conditions and may not necessarily come to pass. Past performance is not a guarantee of future results. Beacon Pointe has exercised all reasonable professional care in preparing this information. The information has been obtained from sources we believe to be reliable; however, Beacon Pointe has not independently verified or attested to the accuracy or authenticity of the information. The discussions, outlook, and viewpoints featured are not intended to be investment advice and do not consider specific investment objectives or risk tolerance you may have. All investments involve risks, including the loss of principal. Consult your financial professional for guidance specific to your circumstances.
