Best Practices for Investors of All Levels
Nearly one-third of American adults have no savings for retirement. Almost half of all U.S. adults aren’t even considering saving for their retirement. Shockingly, a survey by the Consumer Federation of America and the Financial Planning Association found that 21% of American adults believe that winning the lottery is their best retirement strategy. Obviously, relying on the lottery isn’t a sound retirement plan.
The 2014 Wells Fargo Middle-Class Retirement study found that 68% of respondents felt saving for retirement is harder than they thought. Here are six simple rules that can help create a smart long-term investment plan, making investing easier for everyone.
1. Start Saving Early and Let Compounding Work for You
Albert Einstein called compound interest the eighth wonder of the world. The earlier you start saving, the more your money works for you. For example, saving $100 per month from age 20 versus starting at age 30 can result in over $240,000 more growth. Start now and let compound interest do its magic.
2. Invest in Indexes; Don’t Try to Beat the Market
It’s better to aim for the market average rather than trying to outperform it. Passive management, or indexing, aims to match the market’s performance rather than exceed it. Over the long term, beating the market consistently is nearly impossible without additional risk. Moreover, passive funds usually charge lower fees than active funds, saving you money and potentially providing better returns.
3. Don’t Try to Time the Market – Buy and Hold
Research shows the average investor’s annual return is between 3% and 5%, compared to the historical market return of 8.5%. This discrepancy is due to emotional investing, where people chase returns, react to fear, and follow media hype. A strategy of buying and holding investments yields better long-term returns. Don’t let emotions drive your investment decisions.
4. Don’t Chase Returns – The Market Reverts to the Mean
Over time, stock returns and markets will generate their historical average returns. This means that what’s currently performing well isn’t likely to continue outperforming indefinitely. The market will revert to its average, so don’t follow the crowd. Stick to your long-term plan and ignore short-term market trends.
5. Minimize Expenses; Invest in Low-Cost Index Funds
The best predictor of future returns is low fees. Studies show that focusing solely on low fees results in better returns for investors. Expense ratios are a reliable metric when choosing funds – low-cost funds consistently outperform high-cost ones. Prioritize funds with lower expense ratios to enhance your investment returns.
6. Diversify Your Investments
Diversification won’t necessarily increase returns, but it reduces risk. By spreading your investments across various sectors and asset classes, you lower the risk of any particular investment failing. This approach balances potential losses with gains, protecting your portfolio from significant downturns in any single market area. Diversify among different asset types and within each type to achieve a balanced investment strategy.
Invest in a mix of stocks, bonds, and other assets based on your goals and investment timeline. Avoid emotional investing, ignore market noise, and stick to your long-term plan.
Rob Pivnick is an investor, entrepreneur, attorney, and financial literacy advocate. He holds a law degree and an MBA from SMU in Dallas, TX, and serves on the board of Texas’s Council on Economic Education. Professionally, Rob is in-house counsel for Goldman, Sachs & Co., specializing in finance and real estate.
His book, “What All Kids (and Adults Too) Should Know About Saving & Investing,” aims to educate young adults and millennials about proper saving and investing habits. The book covers budgeting, debt, goal setting, risk vs. reward, active vs. passive strategies, and diversification, supported by statistics, charts, and expert insights.