Some of the main keys to long term wealth building are diversification and sticking with a plan. Consider the following when determining what to do with your serious, long term money.
Steps
- Create an investment plan.
- Stick with your investment plan - If you adjust your investment plan, do it for the right reasons, such as a change in the long-term outlook for one of your investments or the realization that an investment no longer meets your goals.
- Diversify and rebalance - By spreading your money among a variety of investments that may rise and fall at different times, you'll avoid taking those big "hits" that your entire portfolio could suffer when one asset class is hit hard. You will also need to "rebalance" your holdings occasionally to make sure the percentages of your portfolio taken up by different assets still fit your risk tolerance and time horizon.
- Reduce the size of an investment that's too large - If you put a large amount of money in a single stock, for example, you are taking a substantial risk. Check current capital gains rates for your bracket. If they are low by historical standards, take advantage of the opportunity to sell off shares of a stock, and move some of that money into other asset classes, thereby diversifying your portfolio. Having too much in one investment is a risk that may not be worth taking.
- Keep investing - Although past performance is no guarantee, over the long term, stocks have significantly outperformed all other asset classes. So, keep investing in high-quality stocks and don't get dissuaded by short-term "bumps" along the way.
- Look for rising income opportunities - To boost your investment income, consider buying stocks that have historically increased their dividend payouts. And dividends may now be even more attractive, if you live in the US, because they are taxed at a maximum rate of just 15 percent. (Keep in mind, though, that stocks are not fixed-income investments and may not pay dividends.)
- Don't forget "growth-and-income" - Many investors are attracted to the potentially high returns of "growth" and "aggressive growth" stocks. But there's almost certainly a place in your portfolio for good, solid "growth-and-income" investments, which provide opportunities for capital appreciation and current income.
- Limit exposure to risky investments - Be cautious about investing in emerging markets, "junk" bonds, technology stocks and commodities such as oil and gold. Before adding these volatile investments to your portfolio, consult with a financial professional who knows your needs and risk tolerance.
- Build a "bond ladder" - By building a "ladder" consisting of bonds of varying maturities, you can help to protect yourself in all interest-rate environments. When market rates are low, you'll have your high-rate, long-term bonds working for you. Then, if rates rise, you can reinvest the proceeds of your short-term bonds into new bonds issued at the higher rates.
- Reinvest, reinvest, reinvest - If your investments generate dividends or interest that you don't need to meet monthly expenses, consider reinvesting that income to put the power of compounding to work.
- Follow principles, not predictions - No one can predict with any accuracy what future years will bring to the financial markets. So, stick with the investment principles that never go out of fashion, such as diversification, investing in quality and maintaining a long-term perspective.
Tips
- Be careful about those from whom you seek advice. Everyone has an opinion, but not everyone willing to talk to you about your money is well-informed.
- Don't try to "time" an investment. Over time the US stock market has gone up...considerably. But most investors barely make a profit because they get in and out of the market and miss out on the big gains over time. The biggest gains tend to happen when you are not looking.
- Develop a comprehensive plan with the help of a professional. Over time they will be your greatest ally. If not, find one that is!
- Invest in those vehicles that will let you sleep at night.
- Remember more risk does not always mean more return. It generally will mean more volatility.
Warnings
- Investing is not guaranteed and does involve some risk of losing principal. Find investments that are of good quality and meet your goal, objectives and risk tolerance.
- You should make sure that you have emergency funds covered first, then short term needs (1 - 2 years) before starting a long term investment. You do not want to touch your long term money until all other sources are exhausted.
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