Investing should be easy — just buy low and sell high — but most of us have trouble following that simple advice. There are principles and strategies that may enable you to put together an investment portfolio that reflects your risk tolerance, time horizon and goals. Understanding these principles and strategies can help you avoid some of the pitfalls that ensnare some investors.
Five smart investing principles
There is no shortage of self-help material available for people looking to boost their investing knowledge. Between television programs, magazines and other information sources, you can read about “the best” this and “the most important” that. It can be easy to get confused, especially when you get conflicting ideas.
Understanding a few key investment principles can be a great place to start. It can give you a better framework to understand the information as you take in the ideas. It can also provide context for evaluating the concepts and strategies suggested.
FIVE PRINCIPLES WE WANT YOU TO KNOW AND REMEMBER
Estimate your time horizon
Generally, if your time horizon is short, you may be more comfortable with a more conservative investing approach. If you have a mid-term or long-term horizon, you may want to be more aggressive because you will have time to recover from periods of market fluctuations and loss.
Know your risk profile
Can you tolerate big swings in the value of your investments, or do you prefer less volatility? It’s a good idea to ask yourself some pointed questions about your attitude and investment knowledge — and to be honest with the answers. Knowing your risk profile is important as you consider various types of investments.
Diversify, diversify, diversify
Diversification suggests that a portfolio of different kinds of investments, on average, may potentially yield a higher return and pose less risk than any individual investment. Diversification does not eliminate the risk of loss if security prices decline, but it can help manage investment risk.
Consider taxes and inflation
"Over the long term, inflation erodes the purchasing power of your income or wealth, as evidenced by the fact that gas priced at 33 cents per gallon in 1967 cost $2.42 in 2017."
Oil prices fluctuate a lot, independent of inflation. Maybe we should use something like this:
Over the long term, inflation erodes the purchasing power of your income or wealth, as evidenced by the fact that $1 in 1972 will now cost you $6.84 in 2022.*
*Source: (Comparing Jan. 1972 to Jan. 2022.) https://www.bls.gov/data/inflation_calculator.html
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Procrastination can be costly. Waiting five or 10 years to start investing potentially could cost you thousands, tens of thousands or even hundreds of thousands of dollars. When it comes to your finances and future plans, time really is of the essence.
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