The Five Simple Rules of Investing | Simple Steps for a Retirement Portfolio Course

Updated : Aug 29, 2019 in Articles

The Five Simple Rules of Investing | Simple Steps for a Retirement Portfolio Course


Investing doesn’t have to be complicated. To grow a portfolio, long-term investors just
need to follow five simple rules. Rule number one: contribute early and often. To achieve exponential growth, you need time
and regular contributions. If you were to invest $200 per week for 30
years, with a 7% rate of return, you’d end up with slightly more than a million dollars. But only $312,000 of that will be your own
contributions. The other $700,000 would be due to compound
interest. But if you can’t afford to contribute $200
per week, any contribution can have an impact, and the sooner you contribute, the more time
compound interest has to work its magic. Think of investing like planting trees: the
best time to start was years ago. The second best time is now. Rule number two: minimize fees and taxes. Even if fees and taxes seem like small amounts,
over time, they can really add up. In our earlier example, if you were paying
just a 1% fee on your fund, in 30 years, you’d have $178,000 less. To limit these fees, choose funds with low
expense ratios. To minimize taxes, contribute to tax-advantaged
retirement accounts like a 401(k) or IRA before you contribute to any other accounts. Rule number three: diversify your portfolio. Putting all of your eggs in one basket is
risky. Different types of investments carry different
types of risk, so try to invest in a variety of asset classes–like stocks, bonds, and
cash–and within those asset classes, further diversify with different kinds of stocks and
bonds. Rule number four: consider your time horizon,
or how many years you have to invest. If you’re saving for retirement, for example,
this might be your retirement date. If you’re looking for higher returns, you
may need to take on greater risk. Younger investors can typically tolerate more
risk, because they have more time to recover. The less time you have to recover, the less
risk you can take. To create a portfolio that matches your time
horizon, combine different types of assets to achieve the best balance between risk and
return. Rule number five: focus on your long-term
goals. The market fluctuates day-to-day, and if you
try to time the market, you may miss out on returns. According to the National Bureau of Economic
Research, If you invested $100,000 in the stock market in 2007 and didn’t touch it,
11 years later, it’d be worth about $238,000. If you had sold your investment during the
recession of 2008 and reinvested it a year later, you’d have $80,000 less than if you
had stayed invested. Remember: contribute early and often, limit
fees and taxes, diversify your portfolio, consider your time horizon, and focus on your
long-term goals. These five simple rules are the most important
ingredients for investing success.

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