Building a strong investment portfolio takes as much self-knowledge as market knowledge. If you don’t have a strong tolerance for risk, you would do well to avoid the volatility of chasing single stocks. While this can occasionally be lucrative, you will more likely find that you are spending too much for stocks that have made the news right before they tumble.
Index Funds
Index fund investing gives you the chance to spread your investing dollars across several funds that will mimic a major fund, such as the S&P or the Dow. As diversification is the best way to make sure that at least some of your money is always making money, an index fund is a way to build steady gains over time.
The purchase of investment funds means that you won’t be able to dispose of single stocks; your investment dollars will be tied into a bundle that can’t be untied until you sell the index fund shares. This is one of your “buy and hold” investments that you should leave alone, though if you want to play a bit with the earnings above the investment, you should purchase stocks and have some fun with some of the money.
Invest Some Play Money
If you have an interest in emerging industries, or are following a world news source that has you wondering what industries will benefit, invest. Set a top limit for what you’ll spend per stock and study individual companies that are making inroads in their industries. If you’re impressed with the CEO or the head of the lab, go ahead and vote for their success with your dollars.
Be aware that this form of investing is little more than gambling. You’re playing the odds based on your understanding of the cards. If you need to count on your investment returns, make sure you don’t put that money into individual stocks.
Inevitably, the stock market will correct and dip. Individual stocks, especially those on the cutting edge of technologies or in the thick of world markets, can drop and never come back, so don’t gamble with resources you can’t afford to lose.
Avoid Volatility
Volatile buying of individual stocks, even if you have studied individual companies, can lead to radical differences in your returns and balances. For long term gains, make sure that you invest the majority of your money in both stocks and bonds.
Some funds may not gain much, but they won’t be as inclined to drop. Index funds will enjoy steady gains. If the whole market corrects, index funds may drop, which means you can buy more of those funds.
Rather than worrying about timing your investments, study your personal investment calendar. How close are you to retirement? During your early investing years, you only need a small amount of money in the most secure funds. You have time and space for volatility. When you are within 5 years of retirement, it’s a good idea to start changing your percentages so that when you need to tap into these dollars you will be confident that the money will still be there.
Change Investments by Your Personal Calendar
Once you know what your retirement expenses will be, you can check your expected social security and figure out if you need to pull dollars from your investments, or if you can let them continue to build.
Regardless of how much you need, make sure you put at least one year of expenses in a money market account. No, it likely won’t make much money. However, in the event of a severe correction, you will have given yourself a year to make adjustments to your living expenses while your investments recover.
Don’t be a gambler with a large percentage of your money. Your future security is dependent on the steady rate of stock gains, good choices and letting your investments grow.
