Strategic Thinking, Smart Investments 1k
A formula for investing success: strategic thinking=smart investments. Here are a few strategies to help you grow your money the smart way.
How much have you invested in your future?
If you’re like the average 20-something, your investment balance outside of retirement accounts is something to the tune of $10,711. That’s a big difference from the typical 60-something, who has over $210,900. Even allowing for the fact that outside investments nearly double when you jump age brackets, that’s a big difference.
Here’s the thing: when you invest, you’re making your money work so that you can have a brighter financial future. But to do that, you need to have a strategy in place. Here are a few methods of strategic thinking for smart investments.
Should You Invest in Stocks?
A stock is a type of security that gives the owner a certain percentage of ownership in the company that issued the stock. An Apple stock doesn’t mean you get to sit in a shareholders meeting with Tim Cook (unless you have a significant percentage ownership) but it does mean you get a vote in shareholders meetings and a share in the company’s profits.
Stocks are one of the three most common types of investments. But are they a smart investment?
To put it simply, yes.
Stocks are unique because they benefit you in two ways: you can earn money on any increase in the price of shares and in dividends.
What Stocks Should You Invest In?
That said, there is a strategy to investing in stocks. Technically, you could invest in any company’s stocks, but that doesn’t mean you should.
First, you should invest in stocks you understand. If you know the industry and the company, you’ll be able to assess the company’s performance and whether they stand a chance of profitability.
Second, only buy stocks in companies with strong business performance and equally strong management. These are both signs that the business will continue to flourish in the future.
Third, always buy stocks on sale. This might seem counterintuitive to the second point, and herein lies the art of investing in stocks. In order to earn a profit on a stock, it’s best to buy it while the company is on the way up. That way, you can realize profits as a direct result of the company’s growth phase.
Are There Options Outside of Stocks?
The one downside of stocks is that they can be quite volatile and you have to keep an eye on the market in order to profit. This means playing dice with a certain degree of risk. For investors who want the benefits of growing their money with fewer risks, here are a few popular options:
- High-yield savings accounts
- Roth IRA
- 529 College savings plan
- S&P 500 Index funds
- Dividend stocks
Keep in mind that you don’t need to invest in just one thing. A strong portfolio is a mix of investments, and you’re always free to start safe and explore as you get more confidence.
Ways to Invest Strategically
The key to smart investing is strategic investing. In other words, don’t just buy or sell investments on a whim—there should be a strategy guiding each decision.
Not sure where to begin? Here are a few techniques every new investor should keep in mind to grow their money.
Pay Down Your Debt
Wait, weren’t we talking about growing your money? Yes, and that’s why this technique should be the first one on your list.
Think of debt as the reverse of an investment. It literally eats away at your income. As of April 2021, the average credit card interest rate was 20.81%. That’s a big deal, considering that the average annual return for stocks has been 10.1% since 1926.
Think about that: the average credit card interest rate is twice your rate of return on stocks.
When you pay off debt, what you’re really doing is removing the need to pay lots of interest. That way, you can refocus more of your income toward investing. It’s so important than some financial gurus recommend paying down all your debt before saving for retirement.
Enlist a Robo-Advisor
Don’t know your asset from your elbow? If you’re new to investing, a robo-advisor is your new investing BFF.
A robo-advisor is a piece of automated software created by an investment company. When you sign up for the service, the robo-advisor manages your money based on certain criteria, often relying on a questionnaire covering topics such as investment goals and risk tolerance.
Plus, many robo-advisors also provide in-app learning about investing so that you can understand how your money grows—and even take charge of it yourself. Think of this software as the great democratizer of investing, making investing accessible to the average person.
That said, if you’re looking for an in-depth financial plan, you should sit down with a financial advisor. Most robo-advisors rely on a simple portfolio management setup and can’t provide the same level of tailored, active planning that a human manager could.
Diversify Your Money
Other than paying down your debt, diversifying your portfolio is the best thing you can do to grow your money.
Remember the saying don’t put all your eggs in one basket? That’s true of investing. Tactics that grow your money involve a certain amount of risk, and not every risk pays off. Diversification ensures that your portfolio is resilient to ebbs and flows in the market and protects you from being crippled by one bad investment.
For example, if you buy stocks, you should buy them in a collection of companies rather than just one. That way, if one falters, you may still benefit from the others.
Don’t Rest Easy on an Employer Retirement Account
The one investment account most people own is an employer-sponsored retirement account, typically a 401(k). That said, just because your employer gives you this account doesn’t mean you should solely rely on it for your retirement savings.
The best way to do this is by researching different types of retirement accounts and opening up an independent one in addition to your employer-sponsored one. A Roth IRA, for example, is a type of tax-advantaged retirement account with different benefits than a 401(k) plan, namely the fact that you get tax advantages when you withdraw the money (in retirement) rather than when you put the money in. Plus, you get way more control over your money than you would in a 401(k).
Ready to Make Your Money Work for You?
In short? Strategic thinking means smart investments. So if you’re ready to invest in a brighter financial future, develop your financial strategy and get ready to start investing.
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