You might be afraid to ask a question about how to properly invest because you think that you should know this stuff. That's not true. It's never too late to learn about investing and how to do it properly. There’s a lot of advice out there from self-proclaimed gurus, magazines, and the media, who all want you to believe certain myths about investing. Here's the truth about how to invest properly.
How to Properly Invest
Understand that you cannot time the market.
No one - even the most experienced and educated investor - can predict the market. Missing just a handful of best-performing days can reduce your portfolio's overall return.
Let's say you invested $1 in the S&P 500 in 1970. By the end of 2015, your dollar would be worth $1,910. However, if you missed out on the 25 best market days during that period, your investment would only be worth $371. Missing the 25 worst days could have an even bigger impact. If your dollar had skipped over the 25 worst days of the market, it would have reached $12,045 by the beginning of 2016. Here's the interesting part: even if you miss the 25 best and the 25 worst days, your original dollar would still have grown to $2,750 those same 46 years. < watch video >
Trying to guess the best and worst days of the market is an impossible feat. Stick with your portfolio through the ups and downs. It will recover and your financial coach is just a phone call away if you have any questions.
Rebalance at least once per year.
Over time, a portfolio's risk profile may adjust due to certain assets increasing in value and others decreasing. Your investment portfolio can benefit from clear diversivication - meaning you have a certain balance between asset classes (cash, stocks, bonds) and within asset classes (diverse stocks.)
Diversification is an investment principle designed to manage risk. However, diversification does not guarantee against a loss. The key to diversification is to identify investments that may perform differently under various market conditions.
Rebalancing your portfolio is an approach to help manage investment risk, and better align with your goals and time horizon. Don't be afraid to ask if your financial advisor is rebalancing on a regular basis and what their process looks like.
Remember that past performance is not an indication of future success.
Keep this in mind as you talk to your financial advisor. The rate of return on investments will vary over time, particularly for longer-term investments. Investments that offer the potential for high returns also carry a high degree of risk. Actual returns will fluctuate.
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