For many people who don’t deal with investments day to day, the topic of investing remains one of the great unknowns.1 Investing can feel overwhelming at the start, but understanding some basic concepts can help you conquer your fear of the unknown. In the spirit of keeping investing simple, here are four general “rules” for investing that can help you achieve long-term financial success.
1. Avoid making emotional decisions with money
The foundations for sound investing are often based in common sense. Positive and negative emotional triggers can impact how we make decisions, including financial moves. This is only natural — your money is more than just numbers in a spreadsheet, it may be needed to fund your retirement and your children’s education. But a sound strategy can help you avoid being swept up in the moment and making a rash decision.
Instead of hopping on a financial and emotional roller coaster, take a pause and remember the mind-money connection. Check in with your emotions. Delay big purchases for at least 24 hours. Talk with other people, particularly a financial advisor, about any big financial decisions. Through these steps, you’ll take the emotional charge out of your financial decisions while sticking to a disciplined investment strategy.
2. Don’t try to “time” the market
Perhaps you’ve heard the saying “buy low and sell high.” In an ideal world, every investment would follow these words. This phrase overlooks a crucial mindset in investing: You want to invest for the long term. The value of the stock market and other assets, like real estate, can go up and down, particularly in the short term. Sometimes people buy stock, for instance, and then the price drops. They panic and sell the stock. Unfortunately, once they leave the market, they lose the opportunity to regain their original investment, as well as the chance to earn in the event the stock increases over time.
As you think about starting to invest your money, take a look at the decades-long performance of various assets. In the decade since the Great Recession, for example, the stock market has had one of its strongest eras in the past 140 years.2 But if people tried to time the market and sold their securities, they likely wouldn't experience the increased earnings today. In short, it’s almost impossible for anyone to time the markets successfully for any period of time.
3. Diversify your portfolio
Even people who claim not to know anything about investing probably know the saying “diversify your portfolio.”3 But what does it mean exactly? It means that a robust, stable portfolio holds a range of assets. This is often described as a “balanced portfolio” — a mix of stocks and bonds that align to how much risk you are willing to take on and how long you have until the funds are needed. Stocks tend to be more volatile, but they may gain more value over time. Bonds, on the other hand, may be slower to earn, but they may also be less risky. Yet there is a world beyond the simple prescription of mixing stocks and bonds.
Building a long-term financial portfolio can also include products like annuities. Further, as long as you continue to pay your premiums, whole life insurance offers a guaranteed death benefit and the policy could accrue value as a cash asset.4,5,6 You can use this money to fund big purchases, such as a child’s education or starting a business. Annuities are also something you can pay for in small increments over a long time, or in one single premium with an insurance company. In return, the premiums you’ve paid can be turned into a guaranteed income stream, helping you achieve income security in retirement.7
4. Work with a financial advisor
When starting to learn about investing, it may feel intimidating to ask for support. But remember, there is no price for entry in working with a financial advisor. Their experience lies in helping people develop customized financial strategies to help meet their long-term goals. And just as everyone has different life goals, some people also begin from very different places. The role of a financial advisor is to help you develop a strategy that works best for you and evolves as your goals do.
As the adage goes, every journey begins with a single step. This holds true with investing — and the first step is in learning more about its key strategies.
Meet with a Park Avenue® Wealth Management financial advisor.