If you’re thinking about how to pay for goals that are seven or more years away, you should be saving and investing now. Consider these five key ways to help pursue your long-term investing goals.
1. Match your investments to your goals
Know your goals, your time frame for achieving them, and how much risk you’re willing to take as an investor. Most investments fall into one of five asset classes that range from “conservative” to “risky.” Cash equivalents (including money market funds, U.S. Treasury bills and short-term certificates of deposit (CDs)) are on the more conservative end of the spectrum, while equities (stocks) are on the riskier end. Generally falling somewhere in the middle are guaranteed investments (fixed-rate products backed by the claims-paying ability of the issuer), fixed income investments (bonds and bond funds), and real estate.
2. Spread your ‘eggs’ among multiple baskets
When you keep your savings in similar investments, you could put your money at too much risk or miss out on potential returns. Consider diversifying, or spreading your savings across several asset classes. In addition to investing across asset classes, you can diversify by investing in multiple subcategories within asset classes. Please note that there’s no guarantee that asset allocation reduces risk or increases returns.
3. Don’t try timing the market
Market timing is when you move your money in and out of equities to try and capture the performance highs and avoid the lows. It’s extremely risky, and even the most experienced investors get tripped up by it. If you sell your stocks during a down period, you may lose out on gains if prices go back up again. Keep in mind that historically, the stock market has recovered from broad slumps, although past performance is no guarantee of future results.
4. Set up a purchase plan–and stick with it
Dollar-cost averaging involves investing a set dollar amount at regular intervals, regardless of market swings. Dollar-cost averaging is particularly useful in a long-term investment strategy. When you invest in something when its price is down, you get more units of the investment for your money, which can lower your average cost per unit. And the lower your cost to invest, the greater your potential return.
When you contribute regularly to a savings and investment account, like an account in your retirement savings plan at work, you're using dollar-cost averaging. Bear in mind that dollar-cost averaging can’t guarantee you a profit or protect you against the risk of loss. It involves continuous investment in securities regardless of fluctuating price levels of the securities. As an investor, consider your financial ability to continue participating in dollar-cost averaging during periods of low-price levels.
5. Keep tabs on your progress
At least once a year, take a fresh look at your portfolio. Over time, market swings can throw your asset allocation out of balance. When this happens, you can move money between investments to keep your portfolio in line with the asset allocation you want.
It’s also important to rethink your asset allocation whenever your life changes–for example, if you get a raise, get married, have a baby or go through a divorce. You might end up deciding to take either less or more risk with your investments.
Whenever you check your asset allocation, make sure your portfolio remains diversified enough to maintain a risk level you’re comfortable with for both short- and long-term investing. While diversification helps reduce risk, there is no guarantee that it will protect against a loss of income.