Investing strategy: six principles to guide you

If you’re relatively new to investing, it can be confusing to consider all the investment options available – from different strategies to specific investments. You can alleviate some of that stress by using time-tested approaches to investing that can help you build confidence, and your nest egg, over time.

There are six basic tenets that can help set you on the path to success:

Diversify your holdings

Ever hear the saying, “Don’t put all your eggs in one basket?” That’s asset allocation, in a nutshell. Asset allocation is how you spread your money over different categories of investments, usually referred to as asset classes. The three most common asset classes are stocks, bonds, and cash or cash alternatives such as money market funds.

Asset classes may also refer to subcategories, such as aggressive growth stocks, long-term growth stocks, international stocks, government bonds, high-quality corporate bonds, low-quality corporate bonds and tax-free municipal bonds.

Some professionals believe that having the proper mix of asset classes is the biggest factor in determining your portfolio performance, potentially even more important than your selection of specific investments within the asset classes.

One of the benefits of diversifying your investments is that asset classes may have different responses to the same market forces. This can allow you to minimize the effects of market volatility while maximizing your chances of a long-term return. The idea is that poor performance by one asset class will be offset by an asset class that performs better.

Determine your time horizon

The amount of time you have to save toward your goals will help guide how much risk you can tolerate and, in turn, help you select investments aligned with your goals.

If you expect you’ll start drawing on your investments sooner, it’s wise to look for investments whose prices remain relatively stable. This type of investment will aim to preserve your principal. If time is on your side and you’re investing for a retirement that’s decades away, you may be able to invest a greater percentage of your assets in investments that have greater price variability, but higher long-term appreciation potential, as long as you’re not as concerned with market conditions day to day.

Before selecting an investment fund, consider its investment objectives, risks, charges and expenses, all of which are outlined in the prospectus available from the fund. Consider the information carefully before investing.

Let compounding work for you

When you leave your money in an investment for longer, you have the opportunity to earn dividends and interest that can be reinvested. Earning interest on your interest, known as compounding, adds up over time, like a snowball rolling down a hill, gradually getting larger. What may start out as a modest investment can grow substantially over time.

Here’s an example: An investment of $10,000 at an annual rate of return of 8% will grow to $46,610 in 20 years, assuming there are no withdrawals and the funds are being invested in a tax-deferred account. In 25 years, it would grow to $68,485; after 30 years, it would grow to $100,627. The power of compound interest is why financial professionals recommend fully funding all tax-advantaged retirement plans available to you.

While the objective is to leave the investment untouched so it continues to grow, you should still review your portfolio on a regular basis. It may be necessary to change investments based on performance or your financial goals. Still, investing for the long haul offers the potential for the most significant returns over time.

Contribute when you can

Adding funds to your portfolio has the potential to accelerate its growth. Here, too, you have options depending on your budget and risk tolerance.

Dollar cost averaging is a method of accumulating shares of an investment by purchasing a fixed-dollar amount at regularly scheduled intervals over an extended time. An employer-sponsored retirement plan, like a 401(k), is a common example of this. These plans periodically invest the same amount from each of your paychecks and invest it through the plan. When the price of a share is high, your fixed-dollar investment buys less; when the price is low, the same dollar investment buys more.

Lump sum investing is a method that makes your full investment at one time. This can be effective if the price of the purchased assets is expected to rise over time, though losses could be incurred in the short-term given the challenges of timing the market.

Stay invested

There’s no denying that the financial marketplace can sometimes be volatile. But it’s important to remember a couple things.

First, the longer you stay the course with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain. Though past performance does not guarantee future results, the long-term direction of the stock market, historically, is up. Keeping your timeline in mind can help you navigate the markets ups and down.

Second, timing the market is extremely difficult, especially during times of heightened volatility. Bad days are often followed by good days, and missing out on even a handful of good days can have far-reaching effects on the long-term performance of your portfolio. Selling during a downturn and buying again after prices rebound could have the effect of locking in your losses.

Even during periods of volatility, some asset categories and individual investments tend to be less volatile than others. Bond price swings, for example, have generally been less dramatic than stock price changes. Though diversification alone can’t guarantee against the possibility of loss, diversifying your holdings can help mitigate risk.

Check in periodically

While a long-term strategy may give you more opportunity for success, you shouldn’t just let it be. Periodically reviewing your portfolio holdings and recalibrating as necessary are integral to success. Economic conditions may have changed the prospects for an entire asset class, or maybe business performance changed the outlook for a particular stock. Aside from circumstances outside of your control, your personal or financial situation may have changed, and your portfolio should reflect that. As you near retirement, for example, you may decide to decrease your risk and seek out investments that are designed to provide a steady stream of income, with less price volatility.

Another reason to review your portfolio is that investments will likely appreciate at different rates, which alters your asset allocation without any action or intention. If you initially decided on an 80% to 20% mix of stocks to bonds, you may find the total value of your portfolio has shifted to an 88% to 12% mix. You may need to make some changes to return to your original allocation – to rebalance your portfolio.

There are a couple ways to rebalance your portfolio in a case like this: You could buy more of the asset class that’s lower than desired with the proceeds from the asset class that’s now larger than you intended. Or you could retain your existing allocation and shift future investments into the asset class you want to build back up. It’s recommended to have a check-in annually.

Investing is a long-term endeavor, one in which you should try to exercise patience and keep perspective. If you can remember these six principles to help guide your investment strategy, you’ll be able to make smarter decisions that lead to success.

The foregoing information has been obtained from sources considered to be reliable, but we do not guarantee that it is accurate or complete, it is not a statement of all available data necessary for making an investment decision, and it does not constitute a recommendation.

Investing involves risk and you may incur a profit or loss regardless of strategy selected, including diversification and asset allocation.

Dividends are not guaranteed and must be authorized by the company’s board of directors.

Dollar-cost averaging cannot guarantee a profit or protect against a loss, and you should consider your financial ability to continue purchases through periods of low price levels.

Past performance is not a guarantee of future results.

Holding investments for the long term does not insure a profitable outcome. Investing involves risk and you may incur a profit or loss regardless of strategy selected.

Rebalancing a non-retirement account could be a taxable event that may increase your tax liability.

This material has been created by Raymond James for use by its financial advisors.