You can achieve your financial goals by using simple, but tried and true, investing principles. Laura covers 7 key concepts to grow your net worth over time no matter if you're an investing newbie or have been at it for decades—even if you don’t have much to invest.
6. Choose investments based on your “horizon.”
Your investment horizon is the amount of time you need to keep your investment portfolio before spending it. For instance, if you’re 40 years old and plan to quit working and live solely on investment income when you’re 65, you have a 25-year investment horizon. This is important to consider because, in general, the longer your horizon the more aggressive you can afford to be.
If you have at least 10 years to go before needing to tap your investments for regular income, you have plenty of time to recover from temporary market downturns along the way. But as you get closer to retirement, it’s wise to shift more of your investments into less risky investments so you preserve your wealth.
In general, stocks are the riskiest investments because their value can change daily; however, they offer the highest returns. Bonds are less risky because they offer a fixed, but lower return. And cash or cash equivalents, such as money market funds, give you the lowest, but safest returns.
I recommend that you start by figuring out how much stock you should own. Here’s an easy shortcut: Subtract your age from 100 and use that number as the percentage of stock funds to own in your retirement portfolio.
For example, if you’re 40, you might consider holding 60% of your portfolio in stocks. If you tend to be more aggressive, subtract your age from 110 instead, which would indicate 70% for stocks. But this is just a rough guideline that you may decide to change.
You might allocate your stock percentage to a variety of stock funds or put it all into one stock fund. The remaining amount would be in other asset classes such as bonds and cash.
7. Avoid investment funds with high fees.
Different funds charge different fees, known as the expense ratio. For instance, an expense ratio of 2% per year means that each year 2% of the fund's total assets will be used to pay for expenses, such as management, advertising, and administrative costs.
If you can choose a similar fund that charges just 1%, that may seem small, but the savings really add up over time when you consider that they come off your potential annual return.
For instance, if you invest $100,000 over 30 years with an average return of 7%, instead of 6%, you’ll save close to $200,000. So, be sure to choose low-cost funds so you get the benefit of higher returns.
Use This Investing Advice to Build Wealth
The key to building wealth is to start saving and investing as much as you can as early as possible. But there’s no shame in starting small. Even putting away just $20 a month is better than nothing. And if you’re starting late, don’t stress about it—just get motivated to start right now.
Setting up your accounts and automating contributions is a powerful step in the right direction. Years from now when you’ve got savings and investments to fall back on or to fund the lifestyle of your dreams, you’ll be so happy that you took control of your financial future.
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