You want to build a financially secure future for yourself and your family—and have the money you need to pursue your dreams. Stashing your money in a savings account is a great first step, but building wealth takes more than just setting aside a portion of your paycheck. It also requires smart investments.
Right now, most regular savings accounts offer returns of just a fraction of a percentage point. Compare that to the stock market, which has historically provided investors with an average annual return around 10%. (Note that this is the average, not a return you should count on; gains and losses vary widely from year to year.)
Consider the difference between these returns on investment in one year:
- If you save $10,000 in a traditional savings account with an annual percentage yield of 0.10%, you’ll earn $10.
- If you invest $10,000 and get a 10% annual return, you’ll earn $1,000.
This is just an illustration, of course, and results will vary. But it shows why investments can be such an important part of a solid savings plan. As with any big financial decision, you shouldn’t take it lightly. Having the right information, a sound investing strategy, and some discipline can help you avoid costly mistakes.
Following these do’s and don’ts can help.
DO: Start Early
The longer you invest, the more you’re able to take advantage of compounding—the ability to earn interest on top of your interest. An extra five or 10 years of compounding could boost the value of your portfolio by many thousands of dollars without requiring additional contributions. Try our Benefits of Compounding calculator to see for yourself. And here’s another key benefit of starting early: The long-term growth of your investments’ value tends to compensate for short-term market volatility by giving you more time to recoup losses from a downturn.
DON’T: Put All Your Eggs in One Basket
It’s a cliché because it’s true. Having a mix of investments is essential to reducing your exposure to risks associated with a specific economic sector. This could mean buying a mix of stocks in a variety of industries or choosing a vehicle that’s designed for diversification, such as a mutual fund or exchange-traded fund (ETF), which spreads your investment dollars across many different stocks. Your age, goals, and risk tolerance will determine the best way to split up your money across asset types.
DO: Focus on Long-Term Growth
Avoid having a “get rich quick” mentality. For most investors, long-term growth comes from holding a mix of investments that offer a combination of stability and steady growth. While the thought of large returns is attractive, it shouldn’t lead to rash decisions or investing in something you don’t understand.
DON’T: Take Risks You’re Not Comfortable With
Investing involves the risk of losing money, so it’s important to consider your tolerance for risk. Your life stage and individual financial situation are two important factors. For example, younger investors are often encouraged to invest more aggressively—taking on greater risk for a higher potential return—while investors nearing retirement may choose a more conservative approach to help protect their nest egg.
DO: Your Homework
Investing is a skill, and there’s a learning curve. Along with partnering with a financial advisor you trust, it’s important to educate yourself about investing. Read books, listen to reputable investment podcasts, and look up investment terms you’re not familiar with. When considering an investment in any stock, bond, or fund, be sure to review its prospectus for details about the offering, including potential risks.
DON’T: Make Decisions Based on Emotion
Emotion-driven investment decisions can be costly. Share prices go up and down all the time, so avoid overreacting to occasional dips. If a stock tumbles badly enough, it may be wise to sell it, but try to avoid making long-term decisions based on short-term volatility.
DO: Make Regular Contributions
Whether you’re investing through a retirement plan, brokerage account, or with help from a financial advisor, continually investing additional funds, as your finances permit, can help make your investment portfolio as productive as possible.
DON’T: Forget About Fees
Expenses vary by financial institution and investment type. Make sure you understand and are comfortable paying any applicable fees, since these will affect your earnings.
DO: Keep Some of Your Savings Easily Accessible
It’s a bad idea to tie up all your money in investments. Make sure you keep enough savings on hand in a federally insured savings or money market account. This will ensure you have easy access to cash when you need it, along with a level of protection that stocks and bonds don’t offer.
One Last Thing…
We know that investing may feel a little overwhelming at first. There are a lot of concepts and lingo that you’ll need to learn, and lots of options to choose from.
That’s why we recommend working with an experienced financial advisor. They can help clarify areas of confusion and assist you in building an investment strategy tailored to your financial situation, goals, and tolerance for risk. A great financial advisor will also help monitor our portfolio, make adjustments as needed, and provide objective financial advice, so you can start investing with confidence.
For information purposes only. The information is not intended to be and does not constitute financial advice or any other advice, is general in nature and not specific to you. Before making investment decisions, you should seek the advice of a licensed financial professional. Investments are not NCUA Insured and may lose value.