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 sub-categories within asset classes. Please note that there’s no guarantee that asset allocation reduces risk or increases returns.
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. 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. While diversification helps reduce risk, there is no guarantee that it will protect against a loss of income.