No matter how well-versed you are on the subject of investing, it’s important to remember the fundamentals. They help you stay grounded, and keep you from getting too far ahead of yourself. Today we offer a few cornerstone ideas of basic investing that will help you remember the rules that got you to where you are.
Even the most sophisticated of investors can benefit from a review of these simple strategies.
Diversify. Regardless of the individual investments you choose, one of the biggest keys to a successful portfolio is to make sure it is properly diversified. This time-tested strategy for portfolio management helps you balance risk while working toward your investment objectives. It’s nearly impossible to know for sure which investments will do well in the future; diversifying your portfolio across different asset classes allows you to make up for any under-performers with hopefully a selection of investments that are keeping pace with — or even outperforming — the market. Of course, diversification does not guarantee a profit, or protect against loss in a declining market.
Control and reduce debt. If you want to make progress toward your financial goals, you have to have your whole house in order, so to speak. If you’re carrying a heavy load of debt, especially high-interest credit card debt, you won’t be able to make any real progress if you’re constantly trying to dig yourself out of a hole.
Compare what you spend with what you need. Quite possibly one of the most basic investing strategies, this simple step can help you to see exactly where you may be having trouble, and also identify areas where you could make additional progress. One very interesting analysis you can perform on your own is to add up how much you spend on little luxury items, and see if you can’t save even more than what you currently put away. For example, a $3.50 latte twice a week adds up to more than $360 a year. While that may not seem like much, think about how many other similar expenses you could change over to savings instead, and you’ll see they can add up quickly. Charting your actual expenditures can give you a clearer picture of what you need to be doing.
Monitor your savings progress. Rather than just putting a plan in place and letting it go on autopilot, it’s not a bad idea to make time to regularly review your progress. An annual assessment at year-end, when you should be doing your tax planning, or at tax-filing time, when you have all your financial documents handy, would give you the perfect opportunity to see where you stand with your savings. Take a close look to see if your original investment strategy is still on track, and if not, figure out what you can do to put things back in order.
Expect the unexpected. As is typically the case with many aspects of our lives, things don’t always work out the way we planned. But you can still plan ahead to help prepare for the unexpected. If you haven’t already done so, you should make sure to set up an emergency fund to cover any unexpected cash needs. You can build a “rainy day” nest egg by stashing away a little bit from each paycheck, or even by collecting your pocket change each month. Having cash reserves on hand will help you avoid using expensive credit during emergencies.
These are some basic ideas to help keep your savings strategies on track. Remember to stick to the fundamentals when it comes to your investments, no matter how advanced you may think you have become.
This article was provided by Chris Facka, MBA, CFP of A.G. Edwards & Sons, Inc. on Marco Island. Chris can be reached at 642-6000.