Last week, the S&P 500 fell over 5%, which according to Bloomberg.com, is the first time since 2011 that broad market index has tumbled so low in one week. As typically happens when markets fall so precipitously, experts are struggling to explain what might be happening, and investors are scared.
At times like this, it may feel like investing comes at too high a price, and that the risk is just not worth it. But markets are cyclical, so they go down as they did last week, but they also go up. While there is no way to guarantee a positive return on an investment in just about anything, when it comes to investing in financial markets, there are steps you can take to mitigate risk and build your own confidence at the same time.
Given last week’s market rout, we wanted to share our “5 Keys to Smart Investing” one more time, to provide a perspective on smart investing.
1. Find YOUR Expert – It’s important to know the market and understand the economy so that you can trust your instinct when it comes to investing. However, you do not have to be an expert. We all have our areas of expertise, and you don’t have to be an expert in all things. But if you’re not an investment expert, you may want to work with someone who is. When you do look for an expert, find one who provides what you need — a style that is comfortable for you and all the information you want. This relationship is a very important one, so make sure you feel good about it, and don’t hire someone until you do.
2. The D-Word – The D-word in investing is diversification. The concept of diversification follows the adage, “Don’t put all your eggs in one basket.” The underlying idea is that all investments will not lose value at the same time. Diversification can happen within asset classes, for example, you can diversify among types of stocks like large-cap and small-cap, and varied sectors like technology and health care. Diversification also happens across asset classes, meaning investing in stocks, as well as bonds, real estate, and other asset classes.
3. Time, Time, Time – Time is a huge asset when it comes to investing. Not only does time allow you to benefit from the power of compounding — earning returns on returns — it allows you to ride out market cycles. Markets don’t always go up, and they don’t always go down. They do both, and timing the market has proven to be difficult. But if you can leave your money invested for a long period of time, you have greater potential to ride out the down cycles and grow more wealth.
4. Cost Management — When you work with an expert, whether it’s someone who manages money for you personally, or manages a mutual fund that you invest in, there will be costs involved like commissions and expenses. These costs are how money managers get paid. But costs vary, and they should relate to the value the expert or fund is providing. So, if a manager or fund is expensive but their performance is not good, it’s a low-value proposition. Remember — you are not making money for yourself until your investment gains have covered the costs of that investment.
5. Education and Engagement — Education and engagement with your money in all areas is critical. For investing, it is important to make sure you educate yourself on an ongoing basis, including self-education through books and media, or formal education through classes, or working closely with an expert. Engagement means monitoring your money, the markets, and the economy, and staying in touch with your financial advisor if you have one. It’s important to understand what is happening in the world, and how it is impacting your money.