As an investor thinking about your financial future, you can minimize your risks and maximize your returns with the right strategies and thorough research. It starts with avoiding making snap, emotional decisions based on the ups and downs of a volatile market by focusing on your long-term financial goals and objective due diligence.
Here are key ways you can make better investment decisions for your future.
Write Down Specific Financial Goals and Timelines
Writing down the specifics of your financial goals and associated timelines — whether you want to buy a 4-bedroom house in two years, send two children through college for $150,000, or retire with $1.2 million by age 55 — gives you the target amounts and dates that determine the best path forward for your saving and investing.
With specific goals and timelines in place, you can pursue strategies to:
- Build Wealth: Contributing to tax-advantaged plans, such as a 401(k), an individual retirement account (IRA), or a 529 plan
- Choose Investment Assets: Selecting aggressive assets for long-term plans or more conservative assets for short-term goals
- Stay on Track: Gauging your progress to make adjustments if necessary
Any good investment goal should be specific, measurable, achievable, relevant, and time-bound (SMART). Writing the goals can provide clarity and motivate you, and it can also help you understand your tolerance for risks and see what you need to learn about your investments.
Model Your Financial Trajectory
It’s important to accurately model your financial trajectory to make better investment decisions. Modeling our trajectory can show you whether you can truly get there from here, how long it will take, and what investments it might take.
This involves forecasting your financial future based on your current financial situation and assumptions and projections based on your goals. Modeling your trajectory lets you see what you can achieve as your income, expenses, and assets change over time.
Two valuable online tools to help you peer into your financial future are ProjectLab and YNAB.
ProjectLab is a web-based tool that can help you plan your financial life. You can input your goals and milestones, cash flow and tax situation, and varying scenarios — including different investment strategies. ProjectLab uses Monte Carlo simulations to provide you with possible solutions.
The Monte Carlo simulation is the same technique many financial advisors use to model the probability of outcomes from many variables.
You Need a Budget (YNAB) is a four-step process designed to reverse the circumstances in which many people find themselves with their money: under its control, thinking and stressing about it.
The goal of YNAB is financial freedom through its four rules, including:
- Age your money
- Give every dollar a job
- Roll with the punches
- Embrace your true expenses
Taking control of your money and adjusting your thinking about money can reduce your stress, allowing you to make better decisions.
Set and Stick to a Financial Strategy
Making good investment decisions can be complex. That’s what makes the planning aspect so crucial. Once you’ve written down your goals and timelines, studied the projections for success, and chosen your investment strategies, set your plan in motion and stick to it.
Markets will go up and down, and you’ll face emergencies. However, you must trust your strategy and keep your long-term financial outcome in mind instead of worrying about short-term fluctuation.
“One of the hardest things for many investors to do is to stick to their original strategy amidst the natural ups and downs of the economic cycle,” says Ty Young, CEO of Ty J. Young Wealth Management. “Most investors make the illogical, emotional decision to sell at the low.”
The time factor is already built into your investment strategy, which focuses on optimizing your investment. According to Young, this means that you don’t have to react to a change in the market.
“For most people, the best investment products maximize growth and minimize — or eliminate — downside market risk,” he says. “It is much easier to live with a plan that doesn’t force you to swallow losses.”
If you’ve properly aligned your short-term and long-term goals with your investment objectives, staying on plan, rather than changing directions, can give you a better chance of experiencing the financial future you want.
Invest Consistently and Frequently
Historically, the market has shown that long-term investing tends to outperform short-term investing. Still, many people try to time the market, moving money in and out of the market or switching asset classes to try to profit from market fluctuations. However, market timing often ends up in losses for individual investors.
Consistently and frequently investing your money is a way to protect yourself from the risk of investing all your money at the wrong time, according to the U.S. Securities and Exchange Commission.
This investment strategy is known as dollar-cost averaging and simply refers to the method of investing the same amount of money at regular intervals over a long period. It might be once a quarter or once a month. Alternatively, you might want to tie it to your biweekly paycheck and automate the process.
The SEC advises that consistent and regular investing of dollar-cost averaging can help you buy more of an investment when its price is low and less of it when the price is high. This reduces the effects of a volatile market and gives you a lower average cost per share over time.
Dollar-cost averaging also can help you avoid the trap of trying to time the market, providing you with better long-term returns.
Research Before You Invest
One of the areas most frequently overlooked by investors is research. While many investors do some measure of research before investing, the amount of research required to make comprehensive, far-reaching investment decisions may surprise you.
For example, Tony Zipparro, CEO of EquitySet — a leading platform for researching stocks that aims to provide institutional caliber tools to retail investors — says that as an investor, you might overlook the necessity of comparing stocks side by side, along with metrics like return on assets (ROA), to gain a sense of relative strength of a stock you want to buy.
“Research often happens in isolation of a single company and its prospects, and while important, no stock trades in a vacuum pursuant to only its fundamental or technical values,” he says. “It sounds silly, but quickly and easily being able to compare large sets of metrics like revenue growth, profit margins, ROA, and cash flow in a single, contextual view is a commonly missed step.”
This is where an investor tends to struggle when trying to understand whether a stock is a good buy or not, according to Zipparro. The random analyses might point in one direction or another, not giving you the best picture to make a good investment decision.
Zipparro said, “Analyzing relative fundamental and technical differences between sets of companies also helps to feed an understanding of the immediacy, given the environment, on when a mispricing might be corrected.”
Start Preparing for Your Future Today
If you’re an individual investor, now is the time to take control of your financial future, starting with making better investment decisions. Better decision-making about your investments can help you minimize the inherent risks in investing.
While there are no guarantees in investing, there are ways to help mitigate risks along the journey to your financial goals. You can make better decisions as you travel toward your financial aspirations by writing down your goals and timelines, modeling your financial trajectory, and sticking to a set financial strategy.
Investing consistently and frequently is critical; the right platforms and technology can provide valuable insights as you research options. By following these strategies for investment decision-making, you can step closer to achieving the financial future you dream of.
Featured Image Credit: Photo by Iam Hogir; Pexels; Thank you.
