It’s easy to understand why some people get panicky when the market drops. If financial headlines unsettle you, keep in mind what your goals are and if anything has changed in your life that warrant a review with a financial advisor. Otherwise, here are some strategies to build and maintain an investment portfolio you can live with through all market conditions.
Make Retirement Investing a Priority
Before you think about investing for any other goals, experts say 10% of your salary should be set aside for retirement. Keep in mind that you have years for your investment to grow and weather the market’s ups and downs. Invest in a tax-advantaged account such as a company-sponsored 401(k), 403(b) or 457(b), or an Individual Retirement Account (IRA). You may get an extra boost from a 401(k) plan because your employer will typically match what you invest. If you have a 401(k), contribute at least the maximum of the match, to take advantage of this free money. These retirement plans allow you to contribute up to $18,500 a year or $24,500 if you’re 50 or older. If you don’t have an employer-sponsored retirement plan or are self-employed, an individual retirement account, or IRA, allows anyone with earned income to save for retirement.
Don’t Try to Time the Market
Many investors react emotionally and get out of the market during volatile times because they want to avoid big losses and so often miss market gains. This is because market timing involves two decisions – when to get out of the market and when to get back in. The best solution is developing a strategy that aligns with your investing time horizon and risk tolerance and then reviewing and adjusting your asset allocation mix annually with a trusted financial advisor.
Asset Allocation Matters
Asset allocation – or having a mix of asset categories such as stocks, bonds and cash – will help you balance both risks and rewards, because they respond to the stock market differently. That means when one asset is up, another can be down. When you are younger, your mix of assets can be more aggressive and over time, you can move to an asset allocation mix that is more conservative. Generally, stocks are considered a riskier investment than bonds, so the older you get you should adjust your investing mix accordingly.
There are many ways to build investment portfolios, but here are simple examples of asset allocation:
Consider Target Date Mutual Funds
If you really don’t feel confident about your investing choices, you may want to consider target date funds. These mutual funds are age-based and adjust asset mixes to start out more aggressively and become more conservative as you get closer to retirement. The caution is to choose ones that match your personal goals and don’t charge expensive fees. A financial advisor can help you decide if investing in one is right for you.
Lean on the Power of Compounding
Over time, you’ll earn interest on the money you invest and eventually, interest on that interest. Once the momentum starts, your investment snowballs. Stocks that pay dividends can help investors capitalize on the power of compounding because the dividends are reinvested to buy more shares of stock, which results in greater dividends.
Get an Annual Review
It’s wise to check in and review your investing choices once a year. Our financial advisors provide complimentary consultations to Members and will help you find creative strategies tailored to your specific needs. Visit schoolsfirstfcu.org/advisors to learn more.
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Extra Credit provides general information to help improve our Member’s financial lives. Every situation is different, so please contact us for guidance on your specific needs. The advice provided in Extra Credit is not intended to serve as a substitute for speaking to a loan representative, financial advisor, or BALANCE counselor who can help tailor a solution for you.
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