Being proactive about investing your money is a good idea, in spite of your instinct to freeze after the past few years of stock market volatility.
If you follow Laura's blog or podcast, chances are you’re pretty savvy with your finances. However, I wouldn’t blame you if the past few years of stock market volatility had you frozen in fear. In an article about investing in the New York Times, Richard Thaler points out:
“Acting like a deer in the headlights can be a good strategy if you are trying not to be seen, but it can get you run over.”
Despite the instinct to freeze, it is a good idea to be proactive about investing your money. If you store your money in a savings account, it will barely keep up with inflation. You work hard for your money, so make it go to work for you! Despite the fact that many people treat it like one, the stock market is not a casino. It's a viable way to build wealth--if you have patience and self-control. The strategy for earning long-term gains through stock market investments is actually quite simple. Here's a 5-step formula for building your perfect investment portfolio:
Step #1: Evaluate and Set Goals
Your perfect investment portfolio is tailored to you. What are your goals? What do you want to accomplish? How much do you need to do that? When do you want to reach the goal? It’s not enough to say, “I want to increase my investments this year.” You need to make it specific like, “I want to have $1 million by the time I retire at 65,” or “I want to save $100,000 for a down-payment on a home in 7 years.” If you’re just starting out, you may want to go with something like, “I want to invest $1,000 a year for the next five years.”
Step #2: Be Realistic
The second step is to be realistic about the investment returns you want. You’re not going to beat the market or get rich quick. The stock market has shown consistent returns over time and your aim should be to match it using a portfolio with a diverse range of investments.
Step #3: Do Your Research
Investing doesn't have to be difficult, but it’s still important to research your investment options and to understand the basic concepts of investing. Read up on topics like:
- Risk vs Return: growing your money while managing your exposure to volatility so the funds are there when you need them
- Diversification: limiting risk by owning a wide variety of investments, such as stocks and bonds
- Asset allocation: achieving the right balance between risk and reward for your comfort level
- Rebalancing: realigning your portfolio back to its original asset allocation after market shifts
The Betterment blog is a great resource for learning more about these important investment concepts. Betterment offers a suite of services that accomplishes diversification, easy asset allocation, and automatic portfolio rebalancing in one place. That allows you to own an efficient, diverse portfolio that doesn’t drain your account with hidden fees on trades or commissions.
Step #4: Avoid Timing Errors
The average investor doesn't earn as much as they could because they meddle with their portfolio. This often results in buying high (you think, it’s a great stock I’m going to buy more!) and selling low (you sell out in a panic). This is the opposite strategy you need to adopt to build wealth. Additionally, the distractions of daily life prevent people from properly managing their portfolios. Investors don’t do what they know they should, like making contributions on a consistent basis or rebalancing. That’s why setting your investment plan and forgetting it, using a service like Betterment, is the best approach.
Step #4 Automate Your Investing
Automation is a simple, yet tried and tested, way to build wealth. When you set up consistent, automatic deposits, you invest money before you even realize it’s been transferred out of your account. Having automatic rebalancing (like we do at Betterment) is the best way to keep your portfolio on the path you originally planned. It’s important to be savvy with your investments, but it shouldn’t be overwhelming or costly. There are smart options to invest and grow your money no matter if you're ultra-conservative or have more risk tolerance. Your greatest ally for building wealth through investing is the power of compounding that happens over time, so be sure to get started!
Laura Adams is the award-winning author of Money Girl’s Smart Moves to Grow Rich. Get the paperback or ebook on Amazon.com! Follow her on Facebook, Twitter, and Google+ Click here to Download 2 Free book chapters!