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7 Investment Tips
Investment objectives and strategies should fit an investor's circumstance. However, here are some general guidelines that can help build a long-term investment portfolio.
1. Identify Goals, Time Horizon & Risk Tolerance
Investment selection will be guided by long-term financial goals such as education savings or retirement. Goals will be further defined by one's time horizon or the length of time one intends to keep their money invested.
Time horizon also determines one's risk tolerance or their level of comfort with fluctuations in the value of their account. For example, an aggressive portfolio of growth stocks can be appropriate for an investor with a long-term time horizon of 20 years, if the investor is comfortable with short-term market fluctuations.
2. Create an Investment Plan
Guided by an investor's time horizon and risk tolerance, an investment plan provides an outline for building and monitoring an investment portfolio. Also known as an investment policy statement, or IPS, the investment plan may provide guidelines used to select, monitor, and replace investments in the portfolio.
Items that may be included in an investment plan are:
- Asset allocation: This is the percentage weight of assets to be held in the portfolio. For example, a long-term investor with a moderate tolerance for risk might choose an asset allocation of 70% stocks and 30% bonds, or 60% stocks and 40% bonds. A risk averse investor might only allocate 10% of their portfolio to stocks.
- Investment selection: Choosing specific investments for a portfolio is the foundation of diversification, which involves spreading money among multiple investments.
- Investing strategy: An investor may want to choose between active or passive investing strategies. Active investing involves buying and selling investments with the goal of earning above-average returns. A passive strategy holds investments such as index funds or target-date funds to match market returns.
3. Choose a Brokerage
Select a brokerage firm, such as a discount brokerage company or a full service broker. A discount broker typically offers services online, where investors can open accounts and place trades for an affordable fee. Full service brokers provide advisory and portfolio management services, but charge higher commissions.
Tip: Those who choose a passive investing strategy may want to consider a robo advisor, which provides automated investing services, such as portfolio allocation and rebalancing, based upon an investor's preferences. Those with complex financial needs may want to consider hiring a financial advisor.
4. Choose Investment Account Type
Choose an investment account type, such as a standard brokerage account or a retirement account like an IRA. Many individuals may be offered an employer-sponsored retirement plan, such as a 401k, which can be valuable for long-term investing.
Tip: It's generally wise to take full advantage of 401k matching contributions. For example, if an employer offers a 50% match up to 6% of employee contributions, the employee should make their best effort to contribute at least 6% of their pay to the 401k plan before making contributions to other investment accounts.
5. Research and Select Types of Investments
With the planning finished and investment accounts open, research and select the types of investments that best fit investment objectives and tolerance for risk.
Mainstream investment types are:
6. Implement the Plan
Plan implementation is the process of putting together all of the investment planning elements, including the purchase of investments. Some investors may want to establish a systematic investment plan, which automates periodic contributions from a bank account linked to the investment account.
7. Monitor Portfolio Risk & Health
Portfolio management is an ongoing process, which requires a periodic portfolio health and risk check to ensure that the portfolio continues to meet the investor's objectives and risk attributes.
The monitoring process for a long-term investor may also include portfolio rebalancing, which involves periodically adjusting one's portfolio to match the original asset allocation plan.
Bottom Line
Long-term investing generally refers to investment goals and strategies with time horizons of more than 10 years. This extended timeframe generally allows long-term investors to be as aggressive as their risk tolerance allows.
