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Investing and building wealth is a long-term process that requires consistent effort and patience. Unfortunately, there’s no quick and easy fix to become a successful investor.
However, there are some basic principles or keys to successful investing that you can follow. By following these principles, you set yourself on the path to achieving your financial goals.
Keys to Successful Investing
1. Set Goals
The first step to successful investing is setting financial goals. What do you want to achieve? Do you want to retire early? Save for a child’s education? Build an emergency fund?
Without specific goals, it’s difficult to determine how much money you need to invest and what types of investments are right for you. Your goals should shape and influence your investment strategy and the specific decisions you make.
It’s a good idea to set both long-term and short-term goals. You can start with the long-term goals and work backward to establish short-term and mid-range goals that will help keep you on track to achieve the long terms goals.
Every financial goal that you set should be specific, measurable, achievable, realistic, and time-bound. That means that when the deadline has passed, you should be able to clearly see whether or not you’ve achieved the goal.
While it’s important for your goals to be achievable and realistic, you don’t want to make the goals too easy. Be sure that your goals will challenge you and push you to achieve something significant.
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2. Understand the Power of Compound Interest
Compound interest (or compounding interest) is the interest you earn on your investment plus the accumulated interest earned on the reinvested earnings. It’s essentially interest on interest, and it can have a major impact on your ability to grow your wealth over time.
For example, let’s say you invest $10,000 at an annual rate of 5%. After one year, you’ll have earned $500 in interest (5% of $10,000). However, in the second year, you’ll not only earn interest on the initial investment of $10,000 but also on the $500 in interest that was earned in year one. So, if you continue to earn 5% annually, in year two you will earn $525 in interest (5% of $10,500).
The impact of compound interest becomes more significant as interest rates and investment returns increase. It also becomes more significant over longer periods of time.
As you can see, the power of compounding interest can have a significant effect on your investment returns over time.
The earlier you start investing, the longer your money has to grow and compound. This is why it’s important to start saving and investing as early as possible. If you wait to start investing, you’re delaying the compounding process and missing out on potential earnings.
3. Have a Plan (And Stick With It)
A well-thought-out investment plan will force you to think about your goals, risk tolerance, time horizon, and investment strategy. It will help to keep you disciplined and focused on your long-term objectives.
Your investment plan should be tailored to your specific situation. There’s no one-size-fits-all solution. Consider factors such as your age, income, debts, expenses, and financial goals when creating your plan.
You should also consider your risk tolerance. Investing always involves risk. There’s potential to lose money, no matter how solid or safe an investment may seem. It’s important that you understand and are comfortable with the level of investment risk you’re taking on.
Related reading: Which Investment Typically Carries the Least Amount of Risk?
Of course, the level of risk of an investment may also have an impact on the potential returns. Lower-risk investments tend to produce lower returns, so you’ll need to find a balance that allows you to pursue the returns you’re looking for without taking more risk than your comfort level allows.
Your risk tolerance is unique to you and depends on a number of factors, including your age, investment goals, financial situation, and personality. Generally speaking, younger investors can afford to take on more risk because they have more time to recover from any losses.
As you get older and closer to retirement, you may want to start shifting your investments into less risky options in order to protect your capital.
If you need help developing your own plan, seek out the help of a financial advisor who can provide personalized advice.
4. Focus on the Long-Term
Investing is a long-term process. It’s important to remember this when making investment decisions.
The stock market can be volatile in the short term. There will be ups and downs along the way. However, over the long term, the market has historically tended to trend upwards.
This doesn’t mean that you won’t experience losses at times. Even in a well-diversified portfolio, there will be individual investments that lose money. The key is to stay focused on your long-term goals and not to let the day-to-day fluctuations of the market derail your plans.
It can be difficult to stick to your long-term plan when the market is going through a rough patch. However, it’s important to remember that market downturns are a normal part of the investing process. They also provide opportunities to buy investments at a discount.
If you sell when the market is down, you lock in your losses and miss out on the potential for gains when the market eventually recovers.
Of course, there are times when it may make sense to sell an investment. But if you’re going to be a successful investor, you need to have a long-term mindset and focus on the big picture.
5. Invest Consistently
Investing is a marathon, not a sprint. You need to be in it for the long haul to see real results.
This means investing regularly, even if it’s just a small amount of money. The key is to start early and maintain a consistent investment schedule.
If you wait to start investing until later in life, you’ll have less time for your money to compound and grow. This is why it’s important to start saving and investing as early as possible.
It may seem like you don’t have much money to invest when you’re just starting out. But even small amounts can add up over time, especially if you invest them regularly.
Dollar cost averaging is a fancy-sounding term with a simple concept. It involves investing a set amount of money at regular intervals regardless of what the stock market (or other investments) are doing. For example, you might invest $100 every month in a mutual fund.
Dollar cost averaging has two main benefits. First, it takes the emotion out of investing. You’re basing your process on a set schedule rather than trying to decide what you think the market will do in the future.
Second, dollar cost averaging helps you to buy investments at a discount. When you invest the same amount of money at regular intervals, you’re buying more shares when the market is down and fewer shares when the market is up. Over time, this can help to smooth out the ups and downs of the market and reduce your overall risk.
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6. Maximize Employee Benefits
If you have access to employer-sponsored benefits like a 401(k) or health savings account (HSA), be sure to take advantage of them.
401(k) plans are one of the best ways to save for retirement. The money you contribute is deducted from your paycheck before taxes are taken out. This reduces your taxable income and can help you to lower your tax bill.
Automation also removes the temptation to use the money for other things. You won’t even see the money since it is automatically deducted from your paycheck and invested on your behalf.
Many 401(k) plans also offer employer matching contributions. This is free money that your employer contributes to your account based on how much you choose to contribute.
For example, your employer may offer a 50% match on 401(k) contributions up to 6% of your salary. In this situation, if you contribute 6% of your salary to your 401(k), your employer will contribute another 3%.
Employer contributions are an incredible benefit, and you should take full advantage of them if they’re available to you. If you don’t contribute, you’re completely missing out on these matching contributions.
An HSA is a great way to save for healthcare costs. Like a 401(k), the money you contribute is deducted from your paycheck before taxes are taken out. This reduces your taxable income and can help you to lower your tax bill.
The money in an HSA grows tax-free, and you can use it to pay for qualified medical expenses now or in retirement. HSAs are only available if you have a high-deductible health insurance plan, but they’re well worth considering if you qualify.
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7. Diversify Your Portfolio
Diversification is one of the most important concepts in investing. It’s also one of the easiest to understand.
Diversification simply means spreading your money across different investments. This helps to reduce your risk because it ensures that you’re not putting all of your eggs in one basket.
For example, let’s say that you invest all of your money in stocks. If the stock market crashes, you could lose a lot of money. Likewise, having too much in one individual stock is also problematic.
But if you diversify by investing in stocks, bonds, and real estate, you’ll take less of a hit if any one asset class declines in value.
The goal is to have a mix of investments that will provide you with a level of comfort and that will help you to reach your financial goals.
The specific investments in your portfolio and the exact asset allocation you should use will vary depending on your personal situation (age, goals, risk tolerance, etc.).
However, stocks will generally make up a higher percentage of your investment portfolio when you’re younger because they have the potential to provide higher returns over time. As you get older and closer to retirement, you’ll want to shift your allocation towards more conservative investments to preserve your capital.
There are many different ways to diversify your portfolio. One easy way is to invest in a target date retirement fund. These funds automatically adjust their asset allocation over time so that they become more conservative as you get older.
Another option is to invest in a robo-advisor like Betterment. Robo advisors will automatically build and manage a diversified portfolio for you based on your goals and risk tolerance.
8. Pay Attention to Investment Fees
Investment fees can have a big impact on your returns over time. That’s why it’s important to pay attention to the fees you’re being charged and to look for ways to reduce them.
There are two main types of investment fees:
- Expense ratios: These are the ongoing fees charged by mutual funds and ETFs. They cover things like management fees, administrative expenses, and operating costs.
- Trading commissions: These are the one-time fees charged when you buy or sell an investment.
Both expense ratios and trading commissions can eat into your returns, so it’s important to be aware of them.
Fortunately, there are ways to minimize these fees. For example, you can avoid trading commissions by using brokerages like Public.com and Webull that provide commission-free trades of stocks and ETFs.
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You can minimize expense ratios by choosing low-cost ETFs or mutual funds for your portfolio. Companies like Vanguard, Fidelity, and Charles Schwab offer a variety of low-cost options. Investing in an index fund is a popular choice for investors who want a simple approach.
9. Review Your Portfolio Regularly
You should review your investments at least once a quarter to ensure that they’re still in line with your goals. This is particularly important after major life events like getting married, having a child, or changing jobs.
Your investment mix should be rebalanced on a regular basis (usually, once per year is sufficient) to ensure that it’s still in line with your target asset allocation.
For example, if you have a portfolio that’s 60% stocks and 40% bonds, but the stock market has been doing well and your portfolio is now 70% stocks and 30% bonds, you’ll need to sell some of your stocks and buy more bonds to get back to your target allocation.
Reviewing your portfolio also gives you the opportunity to check on your progress toward your financial goals. Are you on track to reach your goals? If not, what changes do you need to make?
It’s also a good idea to track your net worth in addition to looking in on your portfolio. Your net worth is simply the value of your assets minus your liabilities, and it’s an important metric for measuring your financial health and progress over time.
10. Be Constantly Learning
Investing is a lifelong journey, and there’s always more to learn. The more you know about investing, the better equipped you’ll be to make smart decisions with your money.
Fortunately, there are a number of great resources out there to help you learn more about investing. You can find books, articles, podcasts, and courses on just about any topic related to personal finance and investing.
You can focus your education on topics that interest you the most or are particularly relevant to you. For example, you could focus on the stock market, real estate, financial independence and early retirement, or some other aspect of personal finance and investing.
All Successful Investors Started Somewhere
If you’re just getting started with investing, don’t worry. All successful investors had to start somewhere. The important thing is that you start today and keep learning along the way.
By following the tips in this article, you’ll be well on your way to becoming a successful investor.
Final Thoughts on Successful Investing
There’s no single formula for success when it comes to investing. However, there are a few key principles that all successful investors follow.
If you’re just getting started, focus on learning as much as you can and developing a sound investment strategy. Then, stick to your plan and don’t let emotions get in the way when you’re making an investment decision. With time and discipline, you can achieve your financial goals.
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