Determine Your Asset Allocation – This involves matching your investment vehicles with your investment goals. Your investment choices should always be based on your age and level for risk tolerance. The earlier you begin to save and invest the more aggressive you can be in selecting amongst investment vehicles and options.
o Diversify your Portfolio – To maximize your returns, and manage your investment risk at the same time, you should not put all your eggs in one basket. Avoid placing more than 4%-6% of your investments in any one stock, including that of your own employer’s. Real diversification means spreading your money across multiple asset categories including stocks, bonds, real estate as well as investing internationally.
o Invest in Index Funds or No Load Mutual Funds – An index fund is a passively managed fund that seeks to mirror the performance of a particular index (i.e. the Dow, S&P 500, Wilshire 5000, NASDAQ, Russell 2000). These funds are specifically designed to duplicate the performance of the unmanaged market index they are tracking. Management fees of index funds are typically no greater than about 0.50%. A mutual fund is a pool of funds of individual investors that is actively managed by a professional investment manager who buys and sells securities for the fund. Mutual funds have different investment objectives (i.e. growth, value, income) as well as various market capitalization sizes (i.e. small, medium and large cap). Each investor owns a share of the portfolio assets equal to his number of shares in the fund. A no load mutual fund has no sales charges, commission fees or redemption fees associated with the purchase and sale of its shares.
o Use Dollar Cost Averaging to Buy Stocks – This technique involves investing equal dollar amounts of money at regular intervals over a period of time. The result of this practice should be acquiring a greater number of shares when the price is lower and fewer shares when the price is higher thereby achieving an average cost per share which is lower than the average price per share. Dollar cost averaging helps minimize the risk of timing the market and thus having to determine the optimal time to acquire shares.
o Track Your Investment Expenses – You must vigilantly track all the investment expenses and commissions you are paying as they will dramatically impact the overall return on your investments. If you are paying heavy loads (expenses) and high commissions on funds which are performing below their general market counterparts you will want to divest yourself of these investments, using a tax savings strategy, as soon as possible. Stick with no-load funds and low commission investment vehicles.
o Rebalance Your Portfolio – Requires matching your portfolio’s allocation of assets to meet your stated investment objectives after any area of your portfolio has experienced significant growth or contraction. This process goes hand in hand with asset allocation in that once you’ve determined your plan and the percentage you want in various categories of investments, you must rebalance or re-allocate your funds within your portfolio to insure that you are in compliance with your plan. Note that rebalancing your portfolio can be more complicated with your non-tax sheltered accounts as it could generate tax consequences.
o Don’t Obsess About Tracking Your Portfolio – Keep your eye on the prize in the horizon and don’t allow every downward market move to rattle you. It’s far too easy to panic when you’re watching daily, weekly or monthly results. You should be in it for the long haul and not influenced by trends and short term market fluctuations.
o Seek Out Investment and Tax Advice – Don’t shy away from seeking the help of a professional when you need it. It’s easy to understand the hesitation many people have in pursuing a so called expert’s advice. The number of advisors who sell products behind the advice they give can make it confusing to know the true motivation behind a professional’s recommendations. That’s why it’s essential to ask how any advisor is going to be compensated and what the amount of that compensation will be. Tax strategies should figure prominently into your investment planning as you want to balance both your pre-tax and after-tax retirement accounts.