Building a Financial Future: Investing for Your Goals
In the first installment of The Foundational Investor Blog, we discussed avoiding bad debt, the benefits of investing over the long term, and the advantages of doing so in different tax-advantaged accounts, such as a 401(k) or Roth IRA.
In the second part of this two-part series, we discuss three investment concepts every investor may want to embrace:
1. The importance of diversification
2. The dangers of market timing and stock picking
3. The benefits of investing according to a plan that fits your personal goals
Get Diversified
Stock market swings can test even the strongest-willed investor in the short term. But over the long term, the market has historically shown a remarkable ability to smooth out performance and head upward. Holding a diversified portfolio of many different types of investments helps weather short-term bumps in the market and benefits from the market’s growth over time.
What is diversification? In a general sense, it’s about spreading your risks around. In investing, that means it’s more than just ensuring you have many holdings. It’s also about having many different kinds of holdings.
While this may make intuitive sense, many investors come to us believing they are well-diversified when they are not. They may own many stocks or stock funds across numerous accounts. However, upon closer analysis, we find that most of their holdings are concentrated in large U.S. company stocks or similarly narrow market exposure. Diversification works because different types of investments react differently as market conditions change. When one investment falls on hard times, others might be performing well and can buoy the overall performance of a portfolio. If all of your holdings are too similar in nature, diversification is unable to work its wonders over time.
