Does the investment world seem intimidating to you?
Do you think investing has lots of arcane terminology, volatile price trends and information overload?
You might not know how to invest for the long term. In fact, you might not know how to invest at all.
But don’t worry. We can help.
The truth is, investing for the long term is more about common sense than about mastering the details of the capital marketplace.
Sure, there are some things you need to know about different types of assets and investment vehicles. But the landscape is less daunting than you might think.
Let’s look at some key success factors for investing for the long term.
#1: Know Your Long-Term Investing Goals
Investing for the long term is all about setting goals.
Identify one or more specific objectives, from retirement planning to college for your kids to a second home. Or maybe you just want peace of mind.
Knowing your “big why” can propel you forward.
Put a time line on each of your goals. How far in the future will you need investment income for that goal? Is that time horizon flexible or set in stone?
You may be perfectly comfortable with the idea of working past the age of 65. You have some flexibility around that date.
But if your daughter is 2 years old you know — as surely as the sun rises and sets — that in 16 years’ time she will be heading off to college. There is no flexibility there.
#2: Know Your Investing Risk Tolerance
The flip side to defining your investment goals is understanding how much risk you’re willing to take on to achieve those goals.
“Risk” in the context of investing means the likelihood that your portfolio will fluctuate extensively over the course of different market cycles. In other words, when the highs are super-high but the lows are ultra-low, you have a greater amount of investment risk.
Generally speaking, the longer the time horizon for your goals, the more risk you can afford to take. But there is a psychological element to this as well. You may not be the kind of person who can sit by serenely while the Dow plummets 500 points in an afternoon.
Your propensity for taking risk will influence how much of your portfolio you allocate to more volatile assets like stocks or commodities.
Which leads to our next point …
#3: Know Your Investment Location Options
When you define your investment goals, you need to identify the investment vehicle most appropriate for that goal.
There are tax-advantaged vehicles that are suited for certain goals, like retirement and college savings. 401(k) plans and IRAs are two good choices for retirement, while 529 plans provide certain benefits in connection with educational expenses. These vehicles can help you make the most of your returns.
#4: Don’t Panic!
Once you are actually in the market, stay disciplined and focused on the long term.
That is easier said than done: the “fight or flight” mechanism is deeply hardwired into our brains. When markets undergo extreme corrections, as they did in 2008, that instinct impels us to flee from the turmoil.
Fleeing, though, turns paper losses into actual losses. Despite how low the market went in 2008, it regained all its losses and reached a new high by 2013.
Panic selling is the surest way to inflict real damage on your path to long-term success.
That said, you do need to rebalance your portfolio periodically. Services like Jemstep’s Portfolio Manager help you rebalance … ensuring you stay on-track for the long-term.
Investing for the long term doesn’t require an MBA. But it does require common sense and discipline.
What are your long-term financial goals?
Want unbiased, high-caliber investment advice? Sign up for Jemstep’s Portfolio Manager.