These are difficult times for investors, what with pandemic scares, supply chain shortages, the specter of inflation, and so many other factors causing volatility at every turn. Is it time to diversify, retrench, double down on risk, or start stuffing cash in a spare mattress?
No investment strategy is guaranteed to be successful in all conditions. But investor advice provided by the U.S. Securities and Exchange Commission is a good place to start if you are evaluating your portfolio and considering your next move. The SEC’s common-sense tips don’t try to steer you into any single approach to investing, but they do encourage you to consider what your investment goals are and the best way to achieve them. Here are some important basics.
- Define your goals. Whether you’re doing this on your own or with the help of a financial planner, the first order of business is to draw up a financial plan — a hard look at your current assets and expected sources of income, what level of financial security you hope to achieve over time and how you expect to get there. Putting actual numbers to your goals is a big step and will help shape your investment strategy.
- Know your comfort zone. Younger investors with a long-term horizon for their financial goals tend to tolerate more risk in exchange for the potential for a greater investment return. If the investment is for a shorter period, it may be preferable to rely on more conservative assets, such as certificates of deposit, rather than stocks or bonds. In any event, you should make sure you understand the risks involved in different investments and which ones are federally insured. The federal government has tools such as BankFind Suite available if you need to verify whether certain savings accounts are insured by the FDIC.
- Spread the risk around. A solid portfolio typically has investments in more than one of the three major asset categories — stocks, bonds, and cash. Developing an appropriate mix of investments can help smooth out the market ups and downs, countering losses in one category with gains in another. So-called “lifecycle funds,” a diversified mutual fund that shifts toward more conservative investments as the investor approaches retirement age, provide a way to automatically adjust the risk level to reflect the investor’s situation.
- More eggs, more baskets. Diversifying is also a way of avoiding too much “exposure” in a single investment — for example, investing too heavily in your employer’s stock, or any one company’s stock. You don’t want to be left holding that one basket if your company of choice takes a nosedive.
- An emergency cash fund for peace of mind. The pandemic has taught us all how quickly jobs can disappear or turn into an indefinite furlough. To avoid having to raid long-term investments (and risking penalties), it’s a good idea to have a reserve in a savings product for emergencies. How much? Six months of income in basic savings seems to be a good benchmark, enough to possibly stave off foreclosure and other disasters.
- Don’t overlook the “free money.” If your employer’s retirement plan offers a match to some or all of your contributions, it makes sense to take advantage of that. In many instances, a workplace plan is one of the easiest and effective ways to save for retirement. At the same time, you should take a close look at the fees and costs of your employer’s plan to determine if the plan is right for you.
- Tune up as needed. Changing market conditions, or changes in your long-term plan, may require you to revisit and tweak your approach occasionally. This should not be done impulsively, in reaction to a single sell-off or market jitters — but if a particular strategy isn’t working or your portfolio needs to be “rebalanced,” don’t consider any strategy so foolproof that it can’t be improved. The overall MO remains the same: Buy low. Sell high.
- If it’s too good to be true, it probably isn’t true. The SEC recommends that investors approach any “hot” new investment with skepticism. Always take the time to do your own research and ask lots of questions before investing.
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