The fundamentals you need for investing success. Charles Schwab & Co., Inc
1. Establish a financial plan based on your goals
- Be realistic about your goals
- Review your plan at least annually
- Make changes as your life circumstances change
Successful planning can help propel your net worth. Committing to a plan can put you on the path to building wealth. Investors who make the effort to plan for the future are more likely to take the steps necessary to achieve their financial goals.
A financial plan can help you navigate major life events, like buying a new house.
2. Start saving and investing today
- Maximize what you can afford to invest
- Time in the market is key
- Don’t try to time the markets—it’s nearly impossible.
It pays to invest early. Maria and Ana each invested $3,000 every year on January 1 for 10 years—regardless of whether the market was up or down. But Maria started 20 years ago, whereas Ana started only 10 years ago. So although they each invested a total of $30,000, by 2020 Maria had about $66,000 more because she was in the market longer.
Don’t try to predict market highs and lows. 2020 was a very volatile year for investing, so many investors were tempted to get out of the market—but investors withdrew at their peril. For example, if you had invested $100,000 on January 1, 2020 but missed the top 10 trading days, you would have had $51,256 less by the end of the year than if you’d stayed invested the whole time.
3. Build a diversified portfolio based on your tolerance for risk
- Know your comfort level with temporary losses
- Understand that asset classes behave differently
- Don’t chase past performance
Asset classes perform differently. $100,000 invested at the beginning of 2000 would have had a volatile journey to nearly $425,000 by the end of 2020 if invested in U.S. stocks. If invested in cash investments or bonds, the ending amount would be lower, but the path would have been smoother. Investing in a moderate allocation portfolio would have captured some of the growth of stocks with lower volatility over the long term.
4. Minimize fees and taxes; eliminate debt
- Markets are uncertain; fees are certain
- Pay attention to net returns
- Minimize taxes to maximize returns
- Manage and reduce debt
Fees can eat away at your returns. $3,000 is invested in a hypothetical portfolio that tracks the S&P 500 Index every year for 10 years, then nothing is invested for the next 10 years. Over 20 years, lowering fees by three-quarters of a percentage point would save roughly $13,000.
5. Build in protection against significant losses
- Modest temporary losses are okay, but recovery from significant losses can take years
- Use cash investments and bonds for diversification
- Consider options as a hedge against market declines—certain options strategies can be designed to help you offset losses
Diversify to manage risk. Investing too much in any single sector or asset class can result in major losses when markets are volatile.
6. Rebalance your portfolio regularly
- Be disciplined about your tolerance for risk
- Stay engaged with your investments
- Understand that asset classes behave differently
Regular rebalancing helps keep your portfolio aligned with your risk tolerance. A portfolio began with a 50/50 allocation to stocks and bonds and was never rebalanced. Over the next 10 years, the portfolio drifted to an allocation that was 71% stocks and only 29% bonds—leaving it positioned for larger losses when the COVID-19 crash hit in early 2020 than it would have experienced if it had been rebalanced regularly.
7. Ignore the noise
- Press makes noise to sell advertising
- Markets fluctuate
- Stay focused on your plan
Progress toward your goal is more important than short-term performance. Over 20 years, markets went up and down—but a long-term investor who stuck to her plan would have been rewarded.
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