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While every investor has their own unique approach, certain best practices have been developed and refined over time by seasoned professionals.
That’s not to say that one investing strategy is inherently better or more successful than another — after all there are no guarantees or crystal balls in the market. However, understanding a few timeless principles can help you make more informed and confident investment decisions.
Key Points
• A longer time horizon may allow investments to weather short-term volatility and potentially benefit from compound returns.
• Automating contributions ensures consistent and disciplined investment habits.
• IRAs and 401(k)s are tax-advantaged tools designed for retirement savings.
• Diversification involves strategically allocating investments across various asset classes to help mitigate potential losses.
• Sticking to a long-term plan helps avoid emotional reactions and supports goal achievement.
Basic Investing Principles
The following fundamentals hold true for many investors across a wide range of situations. While bearing them in mind won’t guarantee specific results, they can help you manage risk, control costs, and stay disciplined through the emotional ups and downs of investing.
1. The Sooner You Start, the Better
In general, the longer your investments remain in the market, the greater the odds that you might see positive returns. That’s because long-term investments may benefit from time in the market, not timing the market.
Markets inevitably rise and fall. The sooner you invest, and the longer you keep your money invested, the more likely it is that your investments can recover from any volatility or downturns.
Starting early also allows you to potentially benefit from compounding returns, which is when your returns earn returns of their own. The longer your money is invested, the more time it has to generate earnings, which you can opt to be reinvested to earn even more earnings, creating a powerful snowball effect.
💡 Quick Tip: Did you know that opening a brokerage account typically doesn’t come with any setup costs? Often, the only requirement to open a brokerage account — aside from providing personal details — is making an initial deposit.
2. Make It Automatic
One of the easiest ways to build up an investment account is by automatically contributing a certain amount to the account at regular intervals over time. If you have a 401(k) or other workplace retirement account, you likely already do this via paycheck deferrals. However, most brokerages allow you to set up automatic, repeating deposits in other types of accounts as well.
Investing in this way also allows you to take advantage of dollar-cost averaging. This is an investment strategy where you invest a fixed amount of money into a specific investment at regular intervals, regardless of its current market price. This approach may help mitigate the impact of market volatility by smoothing out the average purchase price over time.
3. Take Advantage of Free Money
“If you have access to a workplace retirement account and your employer provides a match, contribute at least enough to get your full employer match,” advises Brian Walsh, CFP® and Head of Advice & Planning at SoFi. “That’s a return that you can’t beat anywhere else in the market, and it’s part of your compensation that you should not leave on the table.”
Recommended: Investing 101 Guide
4. Build a Diversified Portfolio
Creating a diversified portfolio may reduce some of your investment risk. Portfolio diversification involves investing your money across a range of different asset classes — such as stocks, bonds, and real estate — rather than concentrating it in one area. Studies indicate that diversifying the assets in your portfolio may offset a certain amount of investment risk by reducing exposure to any single asset or risk source.
Taking portfolio diversification to the next step — further differentiating the investments you have within asset classes (for example, holding small-, medium-, and large-cap stocks, or a variety of bonds) — may also be beneficial.
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5. Reduce the Fees You Pay
Whether you take an active, passive, or automatic approach to investing, you’re likely going to have to pay some fees. For example, if you buy mutual funds or exchange-traded funds (ETFs), the main annual costs, known as the expense ratio, are automatically deducted from the fund’s total assets, directly reducing the fund’s net asset value (NAV) and lowering your overall investment returns.
Fees can be one of the biggest drags on investment returns over time, so it’s important to look carefully at the fees that you’re paying and to occasionally shop around to see if it’s possible to get similar investments for lower fees.
6. Stick with Your Plan
When markets go down, it can feel like the world is ending. New investors might find themselves pondering questions like: How can investments lose so much value so quickly? Will they ever go back up? What should I do?
During the crash of early 2020, for example, $3.4 trillion in wealth disappeared from the S&P 500 index alone in a single week. And that’s not counting all of the other markets around the world. But over the next two years, investors saw big gains as markets hit record highs.
The takeaway? Investments fluctuate over time and managing your emotions can be as important as managing your portfolio. If you have a long time horizon, you may not need to be overly concerned with how your portfolio is performing day to day. It’s often wiser to stick with your plan, rather than buy or sell based on emotional reactions to short-term external factors.
7. Maximize Tax-Advantaged Accounts
Like fees, the taxes that you pay on investment gains can significantly eat away at your profits. That’s why tax-advantaged accounts, those types of investment vehicles that allow you to defer taxes, or enjoy tax-free withdrawals, are so valuable to investors.
The tax-advantaged accounts that you can use will depend on your workplace benefits, your income, and state regulations, but they might include:
• Workplace retirement accounts such as 401(k), 403(b), etc.
• Health Savings Accounts (HSAs)
• Individual Retirement Accounts (IRAs), including Roth IRAs, SEP IRAs, SIMPLE IRAs, etc.
• 529 Accounts (college savings accounts)
Recommended: Benefits of Health Savings Accounts
8. Rebalance Regularly
Once you’ve nailed down your asset allocation, or how you’ll proportion out your portfolio to various types of investments, you’ll want to make sure your portfolio doesn’t stray too far from that target. If one asset class, such as equities, outperforms others that you hold, it could end up accounting for a larger portion of your portfolio over time.
To correct that, you’ll want to rebalance once or twice a year to get back to the asset allocation that works best for you. If rebalancing seems like too much work, you might consider a target-date fund or an automated account, which will rebalance on your behalf.
9. Understand Your Personal Risk Tolerance
While all of the above rules are important, it’s also critical to know your own personality and your ability to handle the volatility inherent in the market. If a steep drop in your portfolio is going to cause you extreme anxiety — or cause you to make knee-jerk investing decisions — then you might want to tilt your portfolio more conservatively.
Ideally, you’ll want to land on an asset allocation that takes into account both your risk tolerance and the level of risk required to have a reasonable chance of reaching your specific financial goals.
If, on the other hand, you get a thrill out of market ups and downs (or have other assets that make it easier for you to stomach short-term losses) and a long time horizon, you might consider taking a more aggressive approach to investing.
💡 Quick Tip: If you’re opening a brokerage account for the first time, consider starting with an amount of money you’re prepared to lose. Investing always includes the risk of loss, and until you’ve gained some experience, it’s probably wise to start small.
The Takeaway
The rules outlined above are guidelines that can help both beginner and experienced investors build a portfolio that helps them meet their financial goals. While not all investors will follow all of these rules, understanding them provides a solid foundation for creating the strategy that works best for you.
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FAQ
How much will $100 a month be worth in 30 years?
The value of $100 invested monthly for 30 years depends on the rate of return. If you consistently invest $100 per month, your total contribution is $36,000. If you earn an average 5% annual return, you’d have about $83,800, assuming returns are compounded daily. At 7%, it’s closer to $123,000 and at 10%, you’d have around $230,000. Keep in mind, however, that investment returns are not guaranteed and these examples do not account for investment fees, expenses, or taxes, which would reduce actual returns.
What are the four golden rules of investing?
While there is no single, universally agreed-upon list, four fundamental and time-tested principles of investing are: starting early to take advantage of compounding returns; diversifying your portfolio to manage risk; keeping costs and fees low; maintaining a long-term perspective and avoiding emotional, short-term reactions to market volatility.
What is the 70/20/10 role in finance?
The 70/20/10 rule in finance is a simple budgeting guideline for allocating your after-tax income. According to this rule:
• 70% of your income should go toward needs (like living expenses) and daily spending.
• 20% is dedicated to saving and investing, building your long-term wealth and financial security.
• 10% is allocated to debt repayment (beyond minimum payments) and charitable contributions.
This breakdown helps individuals prioritize financial health by ensuring savings and investment are part of the core budget.
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Financial Tips & Strategies: The tips provided on this website are of a general nature and do not take into account your specific objectives, financial situation, and needs. You should always consider their appropriateness given your own circumstances.
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Exchange Traded Funds (ETFs): Investors should carefully consider the information contained in the prospectus, which contains the Fund’s investment objectives, risks, charges, expenses, and other relevant information. You may obtain a prospectus from the Fund company’s website or by emailing customer service at [email protected]. Please read the prospectus carefully prior to investing.
Investment Risk: Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.
S&P 500 Index: The S&P 500 Index is a market-capitalization-weighted index of 500 leading publicly traded companies in the U.S. It is not an investment product, but a measure of U.S. equity performance. Historical performance of the S&P 500 Index does not guarantee similar results in the future. The historical return of the S&P 500 Index shown does not include the reinvestment of dividends or account for investment fees, expenses, or taxes, which would reduce actual returns.
Dollar Cost Averaging (DCA): Dollar cost averaging is an investment strategy that involves regularly investing a fixed amount of money, regardless of market conditions. This approach can help reduce the impact of market volatility and lower the average cost per share over time. However, it does not guarantee a profit or protect against losses in declining markets. Investors should consider their financial goals, risk tolerance, and market conditions when deciding whether to use dollar cost averaging. Past performance is not indicative of future results. You should consult with a financial advisor to determine if this strategy is appropriate for your individual circumstances.
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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