We live in an uncertain financial world. Economies expand and contract. Interest rates rise and fall. Markets go up and down. But nobody warns you ahead of time. It can be unsettling, when your savings are on the line. The only thing you can do is prepare your investment portfolio for whatever the future holds.
Here are the tips what you can do best to prepare. 5 principles for successful long-term investment.
1. Don’t try to forecast the economy
The global economy is too complex for anyone to accurately predict. Nobody has the magic, crystal ball. So, don’t manage your portfolio based on someone’s guess.
2. Don’t time the market
Trying to be in the rallies and out for the corrections or just calling major turns every decade, is a waste of time and money. It can’t be done. There might be the occasional good call but to successfully time the market you have to make at least three in a row: a.) you have to buy at the right time and b.) get out at the right time and c.) get back in at the right time. Otherwise, the bull party will start without you.
3. Save more
A lot of people are unprepared for retirement because they simply have not saved enough. 19% of US workers saved less than $1,000 for retirement. 27% have saved less than $10,000 and 33% less than $25,000. To ensure a comfortable retirement, you need to save as much as you can, for as long as you can, starting as soon as you can.
4. Asset allocate your portfolio
Asset allocation is the process of finding the optimal mix of investments for your portfolio. Asset allocation refers to how you divide your assets among stocks, bonds, precious metals, commodities, real estate, crypto and other non-correlated assets to reach your financial goals while taking as little risk as possible. Asset allocation is probably the most important investment decision, responsible for approximately 90% of your portfolio’s long-term returns.
5. Rebalance your portfolio
Each of these asset classes should generate positive returns over the long term. However, they should not be correlated. They will each move at their own pace and that’s the good thing. Once a year, you must rebalance your portfolio to bring back the portfolio to its original percentages by selling back the asset classes that have appreciated and are above the percentage and with the proceeds buying the assets that are below their original percentages. By doing so, you automatically sell high and buy low. It may feel odd to sell asset classes that have done well and buy the ones that are out of favour, but asset classes move in unpredictable up and down cycles. Rebalancing allows you to take automatic advantage without emotions.
Summary: Investors should ignore economic forecasters and market timers, save more, asset allocate properly, and rebalance annually.
These 5 principles will keep you on track to reach your most important financial goals.