Having a busy life filled with family and career shouldn't deter you from building long-term wealth. In fact, they're two of the best reasons for doing so -- and can serve as powerful motivators for creating a nest egg for you and your loved ones and financial independence when retirement calls.
And buying stocks remains the best way for most folks to achieve those goals. Over the past 50 years, the stock market has returned an average of 10% a year. By comparison, for many years interest rates on savings accounts have stood at 1% or even lower.
While they've risen sharply more recently -- as the Fed pumped up benchmark rates to fight inflation -- even the best savings accounts now offer less than 5%. That's similar to the current inflation rate. It's hard to build wealth when your gains leave you more or less treading water in real terms.
Following are some specific tips for those who are just starting their investment journey.
Image source: Getty Images.
Lesson 1: Understand Risk and Reward
Be aware that assets which offer higher potential returns typically also carry higher risk. There's a balance between acceptable risks and possible rewards, and that balance changes over time for individuals as they move closer to their goals, including funding a college education and/or retirement.
It's important to evaluate your own risk tolerance and invest accordingly. It's a personal choice that can change with each move you make, but in general, try to ensure that your choices align with your financial goals and your comfort with that particular risk. Stocks do go up and down over time, and your time window should factor into each choice.
Lesson 2: Variety is the spice of life. Diversify your picks.
Don't put all your eggs, or even most of them, in one basket. Just don't. Horror stories abound. Just ask the employees and other longtime investors in certain well-known energy and utility companies who did that in years past. (Remember Enron?)
Even if your employer's 401(k) plan provides its company match by giving you company stock, you can still diversify your investments across different sectors and asset classes. In fact, it might be especially important then. Diversification in your investing means that if one asset or sector performs poorly, you'll have others in your portfolio that should balance it out.
Lesson 3: Regular investment beats market timing every time
It's conventional wisdom, and in this case, it's right. Timing the market is generally a loser's game. Instead, invest fixed amounts on a regular schedule, regardless of market conditions. That's a strategy known as dollar-cost averaging, and it helps reduce the impact of market volatility while reducing your risk of investing a large amount at an inopportune time.
Lesson 4: The power of knowledge
"Buy what you know" is a powerful notion long endorsed by such stock market titans as Peter Lynch and Warren Buffett. Understand a company before you buy its stock.
Check out its market and competitive position therein, and dig into information about its financial health. That kind of detail is readily available for a publicly traded company, and a good place to start looking for it is the "Investor Relations" section on its website.
Lesson 5: Patience Is Key
The stock market is not a get-rich-quick scheme. It's a tool for building wealth over the long term. Go into your investing with a long-term perspective. Don't be distracted by short-term fluctuations in the market.
Well-chosen stocks give you the opportunity to share in the growth of great companies. Choose wisely, stick with your plan, and don't be swayed by short-term fluctuations in the market. In fact, the more time you have before you need the money, the more risk you might be able to accept in some of your choices.
Empowering yourself and your significant others
Remember, investing isn't just about making money, it's about building the wealth you need for a sound financial future for you and yours.
And to do the best you can for them and yourself, the most important investment you can make is in yourself. Take the time to learn, understand, and apply the principles above. While there's always risk, the rewards of informed, diligent investing are quite likely to follow if you stick to these long-proven principles.
