While no investor can be considered the perfect investor, many have proven themselves to be the smart ones. Different investors use different strategies for specific reasons. Still, some investment advice can be helpful to every type of investor, and here are a few of them.
Understand that Some Losing Investments Should Be Let Go
Losses are a normal part of investing, whether you’re doing it short-term or long-term.
Buy-and-hold investors sometimes incur losses that may be unrecoverable. And even if they managed to return to the green territory in the future, the cost of waiting for that bounce back may not be worth their time and resources.
Smart investors understand that it’s better to let go of some losing investments than continue holding on to them in hopes that they will recuperate losses.
While dealing with a capital loss is not what you initially planned to do, there are still a few instances when having losses can help you. For example, you can use your capital loss to reduce any capital gains tax you owe.
Invest in Index Funds
Index funds are created to reflect the performance of a certain market index. This type of investment vehicle makes for an excellent choice as it can quickly diversify your portfolio since it is a fund holding stocks of a range of companies. By investing in one, you’re immediately betting on different businesses.
Take index funds that follow the S&P 500 index as an example. Putting your money into such a fund provides you access to hundreds of well-known companies in the market, and it only requires you to make one investment.
Remember to Utilize Compounding
The earlier you learn about the benefit of compound returns in investing, the more profit the money from your investments can generate on itself. You just need enough time, and compounding will take care of the rest of the work on your behalf.
Let’s say you invested $10,000 in a fund with an annual return rate of 10%. If you let compounding work on it for two decades, your money would grow to over $67,000. If you let it compound for three decades, that $10,000 would be worth around $174,000.
That is why time is crucial to compounding. The longer you keep the money invested and allow compounding to work its magic, the higher the value can reach over the long term. The total amount climbs every year as the money earning the return increases.
Learn About the Fees Involved
While some brokerages offer free trading services, you still need to know the fees associated with the investment product or service used. Mutual funds and exchange-traded funds (ETFs), for example, charge investors an expense ratio annually for portfolio management and other related services.
Expense ratios are usually charged as a percentage of the investment’s overall amount. So, a 20% expense ratio means you must make a yearly payment of $20 for every $1,000 you invest in the fund.
The differences in percentages may not be a lot between funds, but they can accumulate over time and reduce your gains.
