Investment is about building wealth. You can buy assets with the goal of growing wealth over time, achieving financial independence or securing your future against inflation and unexpected expenses. Key ways to building wealth include diversifying your portfolio, investing consistently, focusing on long-term growth and continually educating yourself on market trends and strategies. Here’s what you need to know.
If you need help picking investments, a financial advisor can help you build wealth with a plan.
Investing Long-Term
To grow wealth, you almost always want to build your portfolio around long-term investments. Among the many benefits, holding your assets for a period of years vs. months or less (short-term investing) gives you more room to invest in higher-return, higher-volatility assets like equities, because you can ride out downturns in the market while waiting to capture asset gains. It will also allow your portfolio to make the most of compounding gains. Over the years, growth will add to growth, helping your portfolio to build wealth faster.
Long-term investing also will give you the opportunity to invest in lower-volatility, income-focused assets like bonds, dividend stocks, ETFs and mutual funds. These investment classes often don’t show their real value for several years, and a patient approach will let you capture those gains over time.
The truth is, patience and long-term investing is a throughline that should guide all of your money management. It might be the single most important key to building wealth through your investments.
Save and Invest With a Plan
Make a plan for how you will save where you will invest your money, then stick to it. The corollary to long-term investing is short-term investing, typically through the practice of “timing the market.” With market timing, instead of trying following a long-term plan, you try to buy and sell around current market conditions. It’s fairly common within higher-volatility asset classes like stocks, futures, currencies, crypto and derivatives.
Investors who try to time the market almost always lose money, either in terms of opportunity cost or even trading losses. There any number of reasons for this including that, at any given time, countless other traders are also trying to time the market. If any given asset sends a reliable signal about future pricing, every trader will react, erasing any opportunity to create real value. So if an asset’s price remains stable, it’s likely because any given pricing signal is unreliable, making your efforts to buy-low/sell-high little more than guesswork.
Instead, make a plan for your savings and investments and stick to it: How much will you set aside each month? How much of that will go to investing and how much to savings? How will you manage risk, and how will that change over time? What assets will you buy, and in what proportion with each month’s investment? When will you sell or roll over given assets?
Stock Investing for Growth and Inflation Management
Equities are the most popular asset class for retail investors looking to maximize their returns. Overall, the S&P 500 has an average return between 10% and 12%, significantly higher than other mainstream options.
Two important ways to invest in stocks include index funds and individual equities.
Many investors start building wealth simply by holding an index fund and investing in it long term. An index fund is a type of mutual fund or exchange-traded fund (ETF) designed to replicate the performance of a specific financial market index, such as the S&P 500.
Others build wealth by investing in individual stocks. A strong stock can outperform the market average. But it’s usually best to do this with the speculation side of your portfolio. Individual stocks are extremely volatile, with the potential to fall all the way down to zero. So make sure to treat this as the high-risk/high-reward asset that it is.
Bond Investing for Income and Stability
Bonds are another common asset class for individual investors. In exchange for an up-front loan, the issuer promises to make regular interest payments over the lifetime of the bond. For most retail investors, the most common assets are Treasury debt and corporate debt.
A typical bond will make interest payments either every quarter or every six months. The interest is expressed as an annual figure. For example, if you have a $100 bond paying 5% interest, you will receive $5 in total payments over the course of that year.
At time of writing the average Aaa corporate bond paid 5.28% interest. The actual interest for any given asset will depend on several factors, including credit of the issuer, market conditions and length of the note. A five-year bond, for example, will pay less than a 20-year bond, because the company will pay more to use your money longer.
Bonds are generally strong assets for someone who wants a better return than simple depository interest. Investment-grade corporate bonds are considered very secure, and Treasury debt is considered a safe investment. The interest-bearing structure of bonds also makes them a good income investment. You will receive regular payments, meaning that you generate wealth from these assets without having to sell them.
Diversify Your Portfolio
Most retail investors hold a mix of debt and equity in their portfolios, and this is generally a good profile for someone looking to build wealth over time. To be sure, there are far more asset classes than this. You can invest in real estate, options, futures and more, but stocks and bonds are solid, asymmetrical assets.
Whatever the makeup of your portfolio, though, make sure to seek diversification in your assets. The narrower your field of investing, the more exposed you are to individual risks and downturns. For example, if you are invested entirely in one company, a single bad CEO can tank your entire portfolio. If you hold only equities, a stock market downturn will hit you particularly hard. Fund-based assets, such as ETFs and mutual funds, are typically good assets for inherent diversification in your portfolio.
Balance this with your timeline and market goals. For example, say that you’re a retirement saver at age 35. Your diversification needs might be met by the basket of assets in an S&P 500 index fund. While this would put all your money into equities, with more than 30 years on your timeline you aren’t worried about a recession or a bear market. You can leave the money alone to recover from a downturn.
However, make sure you continue to pay attention and adjust your strategy as time goes on. You don’t want to turn 67 in the middle of that bear market either.
Bottom Line
There are a few keys when it comes to building wealth with your portfolio. More than anything else, invest for the long run. Make a plan, steadily save and invest according to that plan, then leave your money alone to grow. Slow and steady, as they say, wins the race.
Tips on Picking Investments
- Diversification is often expressed as asset allocation. This is how you balance different assets in your portfolio based on risk, reward and other goals. Here’s how asset allocation can help you build wealth.
- A financial advisor can help you build a comprehensive retirement plan. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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