With the right personal goal-setting and education, you can easily gain confidence and begin your approach to investing. Start investing for your future with these four steps and invest with an eye toward success.
Four confidence-building practices
If you are looking for a good investment strategy, you are not alone. Here is how to begin.
Setting a solid goal is one of the most important steps to start investing. Without an end goal, it's difficult to create a strategy for investing. Maybe it's saving for college or perhaps it's retirement. Maybe you're more interested in short-term wealth creation. Working backward from your goal will simplify your approach, and knowing how much money you'll need and by when will drive decisions now and down the road. A specific goal helps you define your:
How long will you keep your money in the investment? If it’s retirement you’re saving for, find out how many more years you can invest before leaving the workforce. Tailor your investments based on expected risk, returns and your own schedule.
Finding the right type of account that matches your strategy and situation is critical and you have many options from tax-deferred, education savings, trusts and taxable accounts.
How you invest should be influenced by how much risk you are willing to take. Understanding your risk tolerance helps define which investments will work for you. Use the Janus Henderson Asset Allocation Planner to learn more about your stomach for risk.
Arm Yourself with Knowledge
The Janus Henderson Retirement Planner, Asset Allocation Planner and other tools will help you define your goals and start planning.
Some investment accounts, like Traditional IRAs and Education Savings Accounts (ESAs), offer tax-deferred investing. Investing in a tax-deferred account means that returns, both long-term earnings and short-term gains such as dividends and interest, are not taxed until they are withdrawn from the account.
The idea behind tax-deferred investing is to postpone tax payment on earnings until they are withdrawn. When investing for the long-term, take advantage of tax-deferred investing.
Two important concepts that form the bedrock of a smart investment strategy are asset allocation and diversified investing. Keeping both in mind as you assess your entire portfolio will provide opportunities for more stability over time.
Your asset allocation is the DNA of your strategy. It’s the mix of short-term and long-term investments that create the proper level of risk and return characteristics in your portfolio. Asset allocation includes investments such as cash, bonds, stocks and alternative investments that can range between lower and higher risk. Here is a quick review of each:
Lowest risk and lowest return potential. If not invested, cash remains at a stable value.
Bonds (Fixed Income)
Generally lower-risk than stocks and may offer some income. Certain bond funds can serve as a way to limit volatility in a portfolio, while others might be more focused on income and dividend yield.
Typically offer greater volatility but also can include more potential for growth over the long term. Mutual funds can invest in a variety of stocks so it’s important to read the prospectus to learn about what types of stocks each invests in.
Investments that generally act differently than stocks, bonds or cash. They may include real estate, commodities or derivative contracts.
Diversification, at its core, means having a mix of investments that are all affected by the markets differently. It can protect a portfolio from being too heavily weighted in one product, sector or market, since poor performance of one investment can be offset by good performance of another. A good diversification strategy may consider the following:
Company Holdings or Types of Securities
This is the mix of companies that can make up the mutual fund, ranging from small to large, foreign to domestic, and emerging to established, over a variety of sectors.
The total value of the shares outstanding of a publicly traded company; it can be used to show what the market thinks a company is currently worth.
Stocks owned within the same industry, which can include energy, healthcare, communications/media, manufacturing and others.
Geographical areas where companies are located. You can choose to invest in or avoid certain foreign or domestic companies or companies confined to a particular geographic region.
Your mix of stocks, bonds, cash or alternative investments.
Concentration of Holdings
Levels of concentration of particular holdings can contribute to overall diversification. Typically, the more concentrated the holdings, the less diversified the investment. For example, certain mutual funds may hold over 100 different stocks while other funds may only invest in a very limited number of stocks.
Diversification is one of the advantages of mutual funds. By their nature, mutual funds can help you diversify by investing in a variety of stocks in one product. However, don't be fooled into thinking that because you own a mutual fund, that you have diversified your assets. For example, if you own a fund that only invests in energy stocks, a turn in the energy market could impact your entire portfolio. That's why Janus Henderson offers asset allocation funds which are diversified portfolios constructed for certain risk profiles.
Investing with vigilance can take a lot of mental energy, unless you approach it with the right tools. The primary tool in a regular investment strategy is called "dollar-cost averaging," but you can also think of it as "automatic investing."
A long-term strategy
Imagine you had $500 to invest. Is it better to invest the entire $500 at once? Or should you divide it into ten $50 investments? Dollar-cost averaging may hold the answer.
Dollar-cost averaging spreads out a large investment over time to reduce per-share cost. Security prices fluctuate over time. Purchasing power increases when prices fluctuate downward. Buying all shares at once will lock you into that price. This may be great if you’re buying at the lowest price, but timing the lowest point of the market is nearly impossible and rare. A pre-determined buying schedule allows the purchase of many shares over time at different prices allowing you to buy more shares when the price is lower but less when the price is higher.
Basically, if you invest 10 times, your average cost per share has an opportunity to be lower than if you were to invest all at once. An added bonus of dollar-cost averaging is that it’s easy at any time to review your strategy and change it to meet new goals.
It's all perspective.
The goal of investing is to buy low and sell high. This could mean that you will need to stay committed to an investment when it is worth less than what you paid for it. That’s where staying invested for the long term may ease the uncertainty of short-term volatility. By combining regular, automatic investments with a long-term commitment to the market, investors have the potential to see long-term growth in their portfolios.
Learn more about automatic investing.