Proper investing is one of, if not the, most important parts in achieving long-term financial success. Picking appropriate investments is paramount to achieving your financial goals, securing your future, and building wealth over time. Whether you’re looking to save for retirement, buy a home, fund your child’s education, or simply grow your wealth, making smart investment decisions allows your money work for you. Below we'll go through some practical insights on how to decide where to invest and ways to get started in achieving your financial goals.
First, decide why you're investing. How and where you invest will depend upon your specific financial situation, goals, and time horizon. The portfolio of a 30-year-old investor is typically much different than the portfolio of a 50 or 60-year-old. If you're goal is to build wealth over time, many financial advisors recommend basing your exposure to equities vs bonds and historically more stable investments as a percentage equal to 110 minus your age. For example, a 40-year-old would typically hold 70% in equities and 30% in bonds and stable value - such as a money market. Depending on your risk tolerance, this number could be adjusted to 120 minus your age. Given the same example, this would equate to 80% equities and 20% bonds / stable value.
Next, assess the current macroeconomic conditions including news, socio-economic trends and government policies. This could be geopolitical news, sector specific trends and / or monetary policies. Today, all the necessary information you need is readily available in the palm of your hand. Make sure to take the time to understand how and why global events could affect the market as a whole or specific industries. Most of the time, it boils down to simple supply and demand. Talking heads and pundits will try to make things more complicated than they really are but the majority of the time, the likely outcome is what will occur. For example, if there is a sudden drop in the supply of oil and demand is constant or increasing, the price of oil should rise which in turn boosts the profitability of oil companies. Bear in mind that even if you make the appropriate decision, short-term market-wide risk or volatility could have an alternate effect on your investment decision, which brings us to our next step.
Diversify. A well-diversified portfolio limits risk exposure. How diversified your portfolio is again depends on your individual goals, risk tolerance and time horizon. If you are risk averse, meaning you do not want to risk large losses to your portfolio, investing in an exchange-traded fund (ETF) may be a good choice. An ETF is an investment vehicle that is already diversified in its holdings, typically tailored to cover a specific sector of the market, a basket of similar assets, or a particular index. Because an ETF is well diversified, the losses incurred are typically less than holding an individual asset, but the tradeoff is that the return-on-investment (ROI) may also be less.
If on the other hand you prefer to seek risk for the possibility of higher returns, be sure to educate yourself on basic financial literacy. Learn how and why factors such as a company's P/E ratio, cash flow, debt-to-equity ratio, insider holdings, etc. can impact their future market capitalization, dividend distributions, and growth. Once you’ve done the homework, use charting and data analytics only as a confirmation. Understand how to read and interpret a chart to help you decide if the investment is appropriate at the moment.
Decide on which sectors look attractive based on your research. Once you believe that you have identified the best investment decisions for you, the next step is to determine how and where to structure your portfolio. As discussed above, decide if using a 110 or 120 minus your age approach is the best decision or if, given specific circumstances, that allotment would need to be adjusted. Additionally, where you choose to setup your portfolio matters. Some options include an individual brokerage account, traditional IRA, Roth IRA, or employer-sponsored retirement plan such as a 401(k). Which account or accounts you decide to use for investments will have specific tax considerations. Be sure to understand the pros and cons of each as well as their implications during retirement.
Be aware that even if you’ve done all these things right, there’s always market-wide risk involved. Certain strategies such as hedging a position through options or volatility ETFs could help mitigate risk but are typically only recommended for experienced investors.
How and where to invest will depend on your specific financial situation, risk tolerance, and time horizon. If this all seems too complex or you just want to be sure you're making the best financial decision appropriate for you, speak with a financial professional first. Also, be sure to subscribe to the blog and follow us on social media to stay updated and informed. This article is for educational purposes only and not specific financial advice.
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