While investors know there are risks in investing, what investors do not fully appreciate is that there are greater risks in not investing.
In December 2020, American households were holding about $16 trillion in cash – more than three times as much as at the beginning of 2000, according to the Federal Reserve. Having this much cash on the sidelines can be risky for investors, especially during periods of high inflation.
By not investing, you will not achieve your long-term financial goals to build wealth and attain financial freedom. Ultimately, it’s important to remember the reasons why you’re investing and to fully understand the risks of not investing.
Your investment goals are as unique as the route you take to reach them. But regardless of your course, investment firm Edward Jones believes the following 10 investing “rules of the road” can help you in the long term get where you want to be.
1. Develop your strategy
You need to determine and clearly write down your long-term goals, investment time frame and comfort level with risk – before devising an investment strategy. The more you can outline what you are trying to achieve, the better you can tailor your strategy and develop your plan.
Use market declines and automatic investing to your advantage: Edward Jones recommends a disciplined approach. Consider investing a set amount every month, regardless of what the market is doing, to help take emotions out of the equation. Interestingly, this strategy can help turn market declines into opportunities.
2. Understand the risk
As a rule, the higher the return potential, the more risk you’ll have to accept. To determine what makes sense for you, your financial advisor will want to know:
- What is your comfort level with risk? Understanding this can help him or her determine how you may react to market ups and downs over time.
- How much risk are you able to take? The amount of time you have to invest plays an important role in determining how much risk you’re able to take.
- How much risk do you need to take? Your financial advisor will want to determine the return, and therefore the risk, that may be necessary to reach your long-term goals.
Taking an appropriate amount of market risk may be necessary because it’s difficult to meet long- term goals with only short-term investments.
3. Diversify for a solid foundation
Your portfolio’s foundation is your asset allocation, or how your investments are diversified among stocks, bonds, cash, international and other investments. Your mix should align with your goals and comfort with risk.
Edward Jones recommends having some of your portfolio invested in fixed-income and international investments, because historically a more balanced portfolio experienced a higher likelihood of a positive return over time and helped reduce any potential declines. Ultimately, your specific mix of stocks and bonds will be driven primarily by your goals, your risk tolerance and the time until you need the income in retirement.
4. Stick with quality
Of all the factors to consider when investing, Edward Jones believes quality is one of the most important. It’s also one of the most overlooked. Although it may be tempting to buy a popular investment, it may not fit with the rest of your portfolio, and it may be riskier than you expect. If it sounds too good to be true, it probably is.
5. Invest for the long term
Despite stories of fortunes made on one or two trades, most successful individual investors make their money over time, not overnight. One of the biggest mistakes you can make is trying to “time” the markets.
Typically, market declines aren’t what derail your strategies; it’s our reactions to those declines. While stocks certainly can be volatile short term, the long-term trend for stocks has been positive – the longer your time horizon, the higher the likelihood of achieving a positive annual return.
6. Set realistic expectations
First, you’ll need to determine the return you’re trying to achieve – which should be the return you need to reach your goals. Then you can base your expectations on your asset allocation, the market environment, and your investment time frame.
7. Maintain your balance
Your portfolio’s mix could drift from its initial objectives from time to time. You can rebalance to reduce areas where your investments are overweight or add to areas where they are underweight. By rebalancing on a regular basis, you can help ensure your portfolio remains aligned with your objectives and on track to reach your long-term goals.
8. Prepare for the unexpected
Unforeseen events could derail what you’re working so hard to achieve. By preparing for the unexpected and building a strategy to address it, you’ll be better positioned to handle the inevitable bumps along the way.
9. Focus on what you can control
Every investment is the present value of future cash flow. Everything Money
You can’t control market fluctuations, the economy, or the political environment. Instead, you should base your decisions on time-tested investment principles, which include:
- Diversifying your portfolio
- Owning quality investments
- Maintaining a long-term perspective
- Buy with a margin of safety
Any time you go through periods of market fluctuations, it’s important to remember why you’re investing – to reach a financial goal. And if retirement is that goal, the bottom line is one word: cash flow.
10. Review your strategy regularly
The one constant you can expect is change. That’s why it’s so important that you review your strategy on a regular basis.
To regularly review your strategy and make the adjustments you need, you can have a clearer picture of where you stand and what you need to do to help reach your goals.
Ultimately, it’s important to remember the reasons why you’re investing and to fully understand the risks of not investing. The potential risk of not investing is that you do not retire on your terms. Instead, you risk retiring either later than you have planned or with a potentially reduced lifestyle.
The key is finding balance – not too much investment risk, while ensuring you have enough growth potential to reach your long-term financial and retirement goals.
References:
- https://www.edwardjones.com/sites/default/files/acquiadam/2021-11/RES-7558-A.pdf
- https://www.edwardjones.com/us-en/market-news-insights/personal-finance/investing-strategies/investing-rules
There is a difference between money and wealth.
Does Bill Gates have a lot of money?
The answer is no. What Bill Gates has is a lot of wealth, which is determined by his net worth (the difference between his assets and his liabilities). Bill Gates does not have $76 billion in cash.
Money is the medium that buyers give sellers in exchange for goods and services.
His wealth is measured by net worth; his assets include his Microsoft stock and his 22-bedroom home in Washington State, which is valued at over $150 million. He cannot take his house or his Microsoft stock to McDonald’s and buy a cheeseburger with it, but he could take a $10 bill there to buy one.