What’s your personal investment philosophy? How do you decide what to invest in, and when? Knowing the answers to these questions can help you build a portfolio designed to stand the test of time.
But before you can answer those questions, you first need to know your personal investment pillars. These are the rules and standards you follow whenever you’re considering buying, selling or changing an investment.
Your personal investment pillars will help you take a more empowered, proactive approach toward building your portfolio, instead of reacting to market fluctuations.
Here are some potential pillars to help you get started:
Personal Investment Pillars #1: Have a Healthy Emergency Fund
I know that emergency funds are boring. It’s money that you don’t get to do anything fun or interesting with. Its purpose is to sit there, waiting for disaster to strike.
But it’s also there to give you confidence and peace of mind. With a solid emergency fund in place, you can invest from a place of security and growth, not from scarcity and fear. Panicked investment decisions are rarely good ones, and an emergency fund protects you from being in that position.
Personal Investment Pillars #2: Diversification is Key
Diversifying your portfolio provides a sound foundation for your investments to grow over time, regardless of market behavior. It’s the “don’t put all your eggs in one basket” idea.
The tricky part is that there is not one ideal mix of investments for everyone. When you’re deciding how many stocks, bonds, mutual funds or ETFs to hold, you should factor in your age, your goals, and your risk tolerance.
Your age, or how long you have until retirement, is very important. If you’re in your thirties, your portfolio can handle much riskier investments than if you were five years from retiring.
Your goals are another major consideration. Even if you and your neighbor are both 40, that doesn’t mean your investment mix should be the same. If you have kids and want to pay for their education, but your neighbor doesn’t plan to have a family, your investment plans will probably look fairly different.
Finally, your level of risk tolerance plays a big role in your investment style. If you are comfortable with a lot of risk, it’s fine to add in some riskier buys – as long as your portfolio is diversified enough to handle a downturn. And if you’re risk averse, adding just a little risk is totally fine, because your portfolio has a safety net of more stable investments.
Personal Investment Pillars #3: Determine Your Best Allocation
You know that diversification is important, but what exactly does that look like, and how do you stick to it?
A helpful guide is to determine the best mix of investments for your portfolio. For example, maybe you’ve decided that you work best with 70 percent of your investments in bonds, and 30 percent in stocks. This gives you some freedom to add in new investments or sell what isn’t working, as long as you settle back close to your allocation mix.
Personal Investment Pillar #4: Play the long game
The best investment strategies aren’t about quick returns. We have seen, time and time again, that the most powerful portfolios are the ones that are built to withstand decades, or even generations.
Timing the market is almost always a recipe for failure. Staying invested, even in market downturns, pays off far more often.
Personal Investment Pillar #5: Only invest in what you understand
No, you don’t need to run out and invest in bitcoin or gold because your neighbor’s uncle said you should. Don’t let the fear of missing out dictate where you invest your money.
It’s okay to go slow and ignore investment “trends” going around, especially if your primary motivation to invest in those things is fear.
If figuring out where and how to invest makes you nervous, there are countless resources available to help you. Books, podcasts and even apps can help you get started. You can also work with a Certified Financial Planner, who will help you build a strong portfolio to suit your needs.
About Your Richest Life
At Your Richest Life, Katie Brewer, CFP®, believes everyone should have access to financial resources and coaching. For more information on the services offered, contact Katie today.