5 Steps to Invest with Confidence and Stay on Track
While financial news may make us feel panicky, the reality is much more positive, especially for people who take a steady, long-term approach to investing.
How do I know I’m on the right track with my investments? It’s a money question that comes up a lot. When we think about our long-term plans for our money, we want to know we’re making the right decisions and setting ourselves up for success.
These concerns don’t come out of nowhere: Since the Great Recession of 2008 impacted Americans’ homes, livelihoods, and retirement savings, we’ve been particularly wary of Wall Street, unsure if investing is a smart move to make. If you’ve already started investing, news about stock market dips can make you anxious about whether your investments are safe. And if you pay attention to how our politicians talk about the economy and our finances, it’s easy to form doubts.
It’s no wonder so many people worry that they’re not on the right track with investing, or that risk awaits at every turn.
But here’s the thing: While financial news may make us feel panicky, the reality is much more positive, especially for people who take a steady, long-term approach to investing.
Let’s look at history as an example. Did you know the average stock market return is between 7% and 8%, adjusted for inflation, and that even includes dips and recessions?* This means that, by leaving your money in the market and riding out any market downturns, investors have historically still outperformed inflation (typically around 2% a year) and grown their money over time. If you’re like many people, who approach investing as a long-term way to grow their nest egg in a way that’s faster than inflation, then you’re already on the right track.
Additionally, based on this historical data, it’s likely your investment growth would beat any returns you’d get from a traditional savings account, where even high-interest accounts top out at around 2.25%.
The experts also have reassuring words: Investing guru Warren Buffett notes that “America’s economic magic remains alive and well”, thanks to how productive and innovative we are, and that “gains from winning investments have always far more than offset the losses from clunkers.” In other words, as long as American companies continue to grow their businesses and make groundbreaking developments, it’s likely that investing in them can be a means to build your financial future.
Of course, any investment involves risk, but with a cool head and a goal-focused approach, you can take steps to gain confidence that you’re on the right track, no matter what happens with the market.
It all starts with a strong sense of your plans and your values. So, to build a solid financial plan for your future, here are five tips to keep you focused and on track.
1. Define Your Goals and Evaluate Your Options
With any investment strategy, it helps to have a specific goal in mind, like retiring at 60 or buying a house by your 30th birthday. When you have this goal to work toward, you’ll then want to figure out:
- How much money you’ll need for what you want to do (e.g., $1 million for our future 60-year-old retiree; $250,000 for our future 30-year-old homeowner).
- When you’ll need to access that money (e.g., let’s say in 35 years for our retiree, and in five years for our homeowner).
- How much risk you’re comfortable taking on, and financially able to take on, to get where you want to go. So in this sense, risk refers to the possibility of losing money and also the volatility of your investments. For example, our future retiree could choose potentially riskier investments because her goal is many years away, whereas our homebuyer may take a more conservative approach because they have a shorter window to reach their goal. Ideally, your investments will be set up to take on the appropriate level of risk, based on your timeframe and goals.
To get started with your planning, you can also check out our Investing for Beginners blog post, which goes into more detail about the different types of investments and ways to approach risk.
Remember: When making a long-term, goal-oriented plan, you’ll also want to make sure you’ve already paid off your high-interest debt, like credit cards, and that you have an emergency fund covering at least three months’ worth of living expenses. If you haven’t already, give these goals top priority. Once you’ve paid off your high-interest debt and established your emergency fund, you’ll be able to invest more confidently, knowing you have a strong financial foundation in place. In other words, you’ll start off on the right track and set yourself up to stay on that right track.
2. Understand the Level of Risk that Makes Sense for You
As you plan out your investments, take a clear-eyed look at the potential risk. Any investment involves risk, but by diversifying your investments, you can aim to minimize the chance for losses during the timeline you’ve set for yourself.
Diversification is an investing strategy where you choose a range of investments with varying levels of risk and return, so you minimize your risk in the long run. Think of diversification like a balanced diet: It’s a way to get your nutrients in alongside some potential supervitamins, and maybe sneaking a little dessert in there, too. You may have some growth spurts or stomachaches along the way, but in the long run, diversification aims to help you stay healthy.
Let’s look at risk for the future 60-year-old retiree and the 30-year-old homebuyer we mentioned earlier. Even though they have different goals, their strategy is similar: They’ll both want to diversify their investments in a way that can maximize their returns by the time they want to access their money, and reduce the possibility of losses along the way. The risk level in their portfolios, then, should be determined by those timelines and the amount they want to have when they plan to cash out.
Understanding how much risk you can afford and are comfortable with is an ongoing process. To stay on track, come up with a schedule for how often you should check in on your investments, based on the timeline for your goals and your current level of risk. This could be checking in every month, every six months, or at whatever frequency makes sense for you. Which brings us to…
3. Ignore Stock Market News (Most of the Time)
Investing tends to benefit no-drama people who are OK with long-term commitments. So while it’s important to pay attention to the market and check in on your portfolio on a regular basis, you’ll want to make sure you’re doing so in a way that’s focused on your long-term goals, with little emotion involved.
Or, as Wall Street Journal personal finance columnist Jonathan Clements puts it, “forget trying to forecast the market’s short-term direction and instead focus on taking the right amount of risk.”
Remember our 25-year-old investor who wants to retire at 60? Let’s say the market is taking a nosedive and they’ve lost some money. They could panic, or they could remember they’re not planning to retire for another 30 years or so. They could do some research, maybe speak with a trusted advisor, and decide that staying the course is the best way to stay on track with their investments.
Let’s also take a look at our future homebuyer investor, who’s planning to use what they’ve invested in the next year for a down payment. Luckily, they had checked in regularly with their investments, adjusting their portfolio over time, to reduce risk as they got closer to their goal time period. By revising their risk tolerance as they continued to invest, they got through the downturn with minimal losses, and are still planning to buy a home in the coming months. Because of their understanding of risk and the updates they made, they feel confident they’re on the right track.
So, when you’re looking how much attention you should pay to the market, keep your end goals top of mind. There’s no need to get stock alerts on your phone or fall asleep to CNBC every night if you’ve using a “set it and forget it” approach for a goal 10 years away. On the flip side, if your goal is rapidly approaching in the next year or two, more frequent check-ins may make sense. To stay on track, you want to make well-informed, well-timed decisions based on your circumstances, not decisions driven by short-term fear or panic.
4. When You Have a Big Change, Update Your Investments
Up to this point, we’ve talked about making a plan and sticking to it. But if you’re like many people, you’ll have some major changes along the way. Maybe you’ll get married or divorced, have a child, or decide to start your own business. Major life events like these are a great opportunity to revisit your investments and update your portfolio based on your new situation.
On the other hand, your mindset may change. Maybe you’ve been dreaming about taking a gap year to travel the world, and decide to push back your retirement age in order to pay for it. Or, you could stumble upon a real estate listing for your perfect home, and don’t want to wait to put in an offer. Take a look at your portfolio to see what’s possible, and make updates as needed to stay on track.
5. Know if Your Investments are Helping or Hurting the Causes You Care About
Finally, many investors want to know that their money supports the causes they care about, like Clean Water or Gender Equality, and that it isn’t going to companies that don’t match their values. Staying on track then, in this sense, means knowing that your investments are still building the world you want.
If you’re not sure whether your investments are helping or hurting the issues that matter most to you, you’re not alone: A 2016 survey showed 40% of Americans don’t know what their investments are supporting. This means Clean Water advocates could be invested in polluting companies, or people interested in Better Health are invested in tobacco businesses. Ugh! Now’s the time to find out where your money is going.
You could do hours of research, but (ahem) there is a simpler way: When you invest with COIN, you choose three Impact Areas covering the causes you care about most. Our automated investment platform then creates a custom blend of companies working to make a difference in those areas and building a better world.
Your custom dashboard shows you exactly which companies you’re invested in, and we’ll automatically rebalance your portfolio so your money stays invested in the same balance of companies we promised you. And if the causes you care about change, you can update your Impact Areas at any time.
All of us want reassurance that we’re on track: that our investments are going to help us build our financial future, reach our goals, and support our values. Knowing where you want to go, how much you’ll need to get there, how much risk you can tolerate, and which stocks you’re invested in means you’re already more informed than most, and can continue to invest with confidence.