If only crystal balls were real. Then, investing would be so easy.
As it is, investing includes a lot of uncertainty. You could make a lot of money with your investments, but you could also lose money — a prospect so intimidating that many of us don’t invest at all. A recent study found that more than half of Americans don't own any stock or stock-based investments — and among those who don’t, one in five cited "lack of investing know-how" as the reason.
Whether or not you’re in that group, smart investing really comes down to having a strong strategy, and a smart investing strategy typically has the following five characteristics.
If you put all your eggs in one basket and it happens to be the wrong basket, you could potentially lose a lot.
IT’S BASED ON YOUR GOALS
What do you want to do with the money that you’re investing? It may seem like a simple question, but the answer is important because it will inform how you invest. Are you going to need the money in a few years to remodel your home? Or are you investing to cover those extras in retirement 25 years from now? If you’re planning to use the money soon, you might choose to be a little more conservative, so your investments don’t drop in value right before you need them. If you have more time, you might be a little more aggressive, knowing that you could ride out a downturn if necessary.
IT INCLUDES CALCULATED RISKS
Smart investors understand that every stock carries risk and that the markets can swing wildly. But they’re able to stomach the ups and downs because they know they may not get the growth they need to reach their financial goals without some stocks in their portfolio. So if you're investing for the long term and are extremely risk averse, you basically have three choices: Find a way to fight through it and assume a greater (yet calculated) level of risk with your investments; be willing to work longer; or live on less.
It's impossible to overstate the power of a diversified investment portfolio. Unfortunately, many people invest only in what they know: large U.S.-based companies whose products they buy or whose brand names they recognize. But over the long run, it's important to invest beyond those big "large-cap" companies and include stocks from small- and mid-sized companies — both inside and outside the U.S. Why? Because from one year to the next, you never know which type of investment will do well. If you put all your eggs in one basket and it happens to be the wrong basket, you could potentially lose a lot.
Smart investment strategies are designed to be flexible so that you can take advantage of unexpected investment opportunities that might come your way. For example, say the CEO of a successful start-up you've been following decides to take the company public. Could you get in? Do you have cash (or other assets that can be easily converted to cash) to buy stock in the business? That's just one example of how having a flexible investment strategy can work to your benefit.
IT’S FINE-TUNED REGULARLY
Investing is not a set-it-and-forget-it proposition. You need to make adjustments along the way to keep your investments aligned with your goals, your investing time frame and tolerance for risk. For example, say your investment portfolio is composed of 60 percent equities and 40 percent fixed income. If stocks have a great year, your allocation to equities may suddenly end up growing to 70 percent of the value of your portfolio. The good news? You made money. The bad news? With 70 percent of your portfolio now in stocks, you may be taking on more risk than you'd like. In that case, you may want to consider “rebalancing” your portfolio back to a 60/40 alignment by selling some stocks. Many successful investors rebalance their portfolios systematically — every six months to a year.
You should also revisit your portfolio as your personal circumstances change over time. If you get married, have children or are nearing retirement, your investment time frame and risk tolerance will also likely change. Making sure your investment strategy evolves with you is key to helping you meet your goals, both now and in the future.