Kiplinger’s presents four mantras for stress-free investing. If you’ve been feeling nervous about the stock market lately, perhaps considering these ideas will put you in a relaxed state of mind.
1. Think Long Term
The longer you have until your savings deadline, the more risk you can afford to take. If your goals are decades away, consider putting all your money in stocks or stock mutual funds. You’ll experience some swings in the market, but if you hold fast to your strategy, it should pay off in the end.
The more time you have on your side, the less you have to worry about day-to-day swings in the market, and the other things the media love to amplify, like scandals and weather events affecting the economy. Hang in there, with a portfolio of mostly stocks. Here’s why: “Since 1926, stocks have returned an average 10% annually… Bonds, by comparison, returned less than 6% annually.”
But if your investments are too heavily weighted on one stock or even one particular kind of stock, you can deep-six your savings goal. (Remember the tech bubble?) But this is where having a plan — and sticking to it — comes in handy.
The article goes on to suggest mutual funds as a good way to achieve instant diversification. You have to be careful with the mutual funds you choose, however. While the article suggests certain ratios between growth and value funds and between large-cap and small-cap funds, I think a broad index fund is a good way to strike a good balance. When that is not available, which is the case in my 40(k) for example, I still like to take some extra risk since I’m still relatively young (as my coworkers enjoy reminding me — a few months ahead of 30 doesn’t feel young).
3. Dollar-cost Average
This method of investing makes sense with accounts that do not have a commission or sales load. By investing smaller amounts at regular intervals rather than large sums at once, you reduce your risk exposure to time. For any time you’re investing when the market is up, you’re likely also investing when the market is down. It’s a safe way to play, since it’s been shown that people in general are not very good at timing the market.
A simple strategy called dollar-cost averaging can help keep your emotions in check. By investing a fixed dollar amount at regular intervals you smooth out the ups and downs of the market. Take out all the emotion and guesswork and investing becomes much less stressful.
When you have a diversified portfolio, some portions of your account pay outperform other sections. This is a good reason to consider rebalancing your portfolio. If you determined the optimal portfolio allocation for your age and goals, it won’t take long for the allocation to become skewed. Rebalancing counters that effect.
While selling issues that are doing well may seem counterintuitive, rebalancing your assets helps you avoid investing on emotion and forces you to buy low and sell high, reducing the volatility of your portfolio and keeping your long-term investing strategy on track.
Hopefully, keeping these four points in mind will help keep the level of stress low while thinking about investing. It certainly beats, “Close your eyes and think of England.”
Updated February 7, 2012 and originally published November 16, 2005. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.