Investing is like an art form: Each person has a lot of latitude to build a unique portfolio that reflects who they are and what they want. But there are still some basic principles that just about everyone follows.
When it comes to investing, these principles can mean the difference between growing your fortune and losing it, especially in volatile times like these. Here are a few of these key rules to keep in mind, whether you're a seasoned or beginning investor.
1. Don't panic
A lot of people have watched their investment portfolios plummet this year, and that naturally causes anxiety, especially among retirees who count upon their investments to help fund their living expenses. But making hasty decisions, like selling a bunch of stocks in an attempt to stop the bleeding, could make your problems worse in the long run.
The wealthiest investors understand that sometimes the best thing you can do is be patient and trust that you've made sound investments. The stock market has gone through rough patches before and has always rebounded, though sometimes it takes a few years.
Rather than getting hung up on short-term losses, think about the long game. If you're tempted to make emotional investing decisions, limit how often you're checking your investment accounts.
2. Fees matter
Investment returns matter, but they're only part of the story. Nearly all mutual funds and ETFs have at least some fees and these eat into your profits. You can reduce how much you pay by choosing your investments carefully.
Wealthy investors consider fees just as much as potential returns. Index funds are a popular option because they offer instant diversification and typically have lower costs than actively managed mutual funds. These funds track a market index, like the S&P 500, so when the stocks in the index do well, so does the fund. They usually don't see a lot of turnover because the companies in the market indices change infrequently. That means there's less work for fund managers to do, and this results in lower fees for investors.
If you're not sure how much you're paying in fees, check your prospectus to find out. You should also look into what fees your broker charges you, especially if you buy and sell frequently. Try to avoid paying more than 1% of your assets in fees annually if you can help it, and lower is even better.
3. Risk tolerance is important
There is some risk to investing, so you always need to keep in mind how much you're willing to lose. Younger investors can gamble a little more with their retirement savings, for example, because they have a lot of time to make up for a short-term loss before they need to use those funds. But adults fast approaching retirement age need to be more careful, as a serious loss could completely derail their retirement plans.
Risk tolerance is different for every person depending on their financial goals, but it's something you should always weigh when choosing your investments. Selecting investments that are too risky is a bad idea because you could lose your savings when you need them most, but investments that are too safe are also problematic because you may not see the returns you need to reach your goals.
Investing well requires a lot of practice, but you'll always need this foundational knowledge, no matter your level. Keep the above tips in mind every time you review your portfolio or purchase new investments, so you can keep growing your wealth.