Five principles to ensure your money is rightly invested.
INVESTORS today are faced with ever-changing market conditions, an often overwhelming amount of information from the media and an increasing number of investment choices. It’s not surprising that the world of investing can seem complex.
This complexity can lead to investing pitfalls that may result in lost investment gains over the long term. In fact, over the past 20 years the average equity mutual fund investor has underperformed the market by 2.9% – mainly due to investor behaviour.*
But the principles of successful investing are quite simple. The five tried and true investment principles outlined here can collectively serve as a blueprint for building an effective long-term portfolio designed to achieve your financial goals.
Getting an early start on investing is one of the best ways to build wealth. Investing for a longer period of time is largely recognized as a more effective strategy than waiting until you have a large amount of savings or cash flow to invest. This is due to the power of compounding. Compounding investment returns is the snowball effect that occurs when your earnings generate even more earnings.
Essentially, your investments grow not only on the original amount invested, but also on any accumulated interest, dividends and capital gains. The longer you are invested, the more time there is for your investment returns to compound. Time has historically enabled investors to take take advantage of long-term market returns to effectively grow portfolios over the long run.
Achieving your long-term financial goals begins with saving enough today. Saving for a major goal like a house, post-secondary education or retirement requires significant thought and decision making – but that is only half the battle. It is vital to know how much you need to begin saving today in order to have a large enough investment portfolio to support your future goal.
Generally, the more you save today, the less you will need to save in the future to achieve the same goal as someone who invested more over a shorter period of time. Your current income is a useful starting point for calculating certain long-term goals – like your retirement savings needs – since the more you make today, the more savings you will likely need to fund your lifestyle in retirement.
DIVERSIFY YOUR PORTFOLIO
It’s important to spread your investments across different asset classes. When it comes to investing, one of the easiest ways that you can manage risk and improve your probability of success is to take advantage of diversification opportunities through different asset classes, geographical markets and industries. Financial markets do not move in concert with one another. And at various points in the market cycle, different types of investments or asset classes – such as cash, fixed income and equities – will have varying performance.
This performance varies because asset classes can respond differently to changes in environmental factors, including inflation, the outlook for corporate earnings and changes in interest rates. By holding a combination of different asset classes in your portfolio, you can take the guesswork out of predicting winning and losing investments in any given year.
HAVE A PLAN
Don’t let your emotions influence your investment decisions.
When market volatility increases, even experienced investors can become overly focused on short-term movements. This can lead to hasty decisions, chief among them timing the markets – investing after markets have already risen and/or redeeming existing investments after markets have already fallen. The key to avoid making rushed investment decisions is to maintain perspective and focus on the long term.
With a well-structured plan in place, you can confidently remain committed to it, knowing that day-to-day market fluctuations are likely to have little impact on your longer-term objectives or on the investment strategy designed to get you there.
There will always be events that affect equity markets in the short term; over the long term, however, markets have historically moved ahead.
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