Some people think that investing is a matter of luck — like winning the lottery or discovering the next Microsoft or Google. However, successful investors will tell you that luck has very little to do with their achievement. Here are five general principles that can help you invest more wisely toward a more secure retirement.
Take advantage of every opportunity you have to invest tax deferred. Don't touch your retirement investments until you are ready to retire. And don't borrow against it unless you have no other resources.
Diversify your investments.
Choose a mix of investments for your retirement investments: stocks for their growth potential, bonds for potential income and cash equivalents for liquidity and relative stability. When you combine all three asset classes, you have some cushion against adversity in any one class and you'll spread your risks.
Diversification reduces risk but does not eliminate it.
Have a plan — and maintain it.
Once you choose investments that match your risk tolerance and decide how much money to commit to each asset class, review your plan every year to determine whether it is still on track.
Because stocks, bonds and cash tend to move in different cycles, you may find that the asset allocation you started with at the beginning of the year may not be the asset allocation you have on December 31. If any of your allocations have strayed from their targets you may want to bring them back into balance by trimming your largest positions and adding to the smaller.
This strategy, called rebalancing, is easy to do in a retirement account because there are no tax implications. For tips on rebalancing within a taxable account, consult a tax professional.
Invest automatically through dollar cost averaging.
The easiest way to build your assets over time is to adopt an automatic investing program. Choose an investment, an interval and an amount. Commit to a disciplined program for investing and stick to it no matter what is happening in the markets around you.
This strategy, which is called dollar cost averaging, won't ensure a profit or prevent a loss, but it may help lower your average share price over time. And, it can help keep you focused on your long term goals.
Keep in mind that you should be able to sustain your investment plan in order to gain the potential benefits of dollar cost averaging.
Know your risk tolerance.
If you feel confident about your investments when the market is soaring but you head for the exit when you lose ground, you're probably investing beyond your risk tolerance.
Take a look at your asset allocation. Make sure you understand the risks involved in each one of the funds you own. Then, reallocate into your own personal comfort zone by choosing more appropriate investments to replace highly volatile funds.