Investing is a very complex business, even for those with the training and credentials to do it full-time as a job.
It’s a heavily regulated industry, and even then there are many ways to steer yourself wrong. The unknowns are many and practically unknowable, things such as inflation, market price appreciation, interest rates and political change.
So what business does anyone have investing on their own? Plenty, when you consider the facts.
There are just three things that serious, long-term investors should worry about understanding. The rest, all those unknowns, are in fact best ignored.
1. How long will you be invested?
Financial planners call this “time horizon.” What it means is, how many years will you be able to leave your money in investments, where they can grow and compound?
If the answer is “decades” you don’t have a lot of choices to make. Own mostly, maybe even 100% stocks, in an index fund and forget about buying and selling.
If the answer is 10 years or less consider a portfolio that owns other investments and thus offsets the volatility of stocks. You are less likely to make bad choices if the experience is smoother and more predictable.
2. How much up and down in the market can you personally tolerate?
Some people can watch the stock market fall 1,000 points and just shrug it off. Other people see a headline that says “Dow down 1%” and dial up their broker in a panic.
A 1% move in the stock market is normal, day in and day out. If you have an itchy trigger finger when it comes to investing, a portfolio that rebalances automatically can help you overcome the jitters.
The result will be a more consistent investing outcome, and that’s how you grow money over the long run.
3. Can you save enough?
More than the movement of stock prices alone, how much you invest really matters. Stocks return a fairly predictable annual gain over the years, about twice the rate of economic growth if you reinvest dividends.
Bonds will grow more slowly. Since those average return numbers are fixed over decades, the factor that most determines your success is the size of your contributions over the years, not market returns.
Focus on these three factors — time, volatility and savings rate — and your investment success will be virtually a foregone conclusion.
Lose sight of these driving factors and focus instead on things you cannot control and you are likely to have a much less favorable experience over the years, along with plenty of frustration when things don’t work out as you had expected.
MarketRiders, Inc. is a registered investment adviser. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and, unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein. Past performance is not indicative of future performance.