Making the right investment decisions is the key to building sustainable wealth that can provide you with the retirement of your dreams. The financial markets have more competition than ever before since anyone can now place trades over the Internet without needing a broker. Automated high-frequency trading systems are also increasing the difficulty associated with investing by executing trades before humans have time to react. Understanding the best ways to invest in your future, therefore, is critical for beating the growing competition in today’s financial markets.
1. Use Tax Planning to Increase Compound Growth
Taxes are an unavoidable necessity in life, but paying taxes on a yearly basis undermines your ability to build wealth through compound growth. Using a 401(k) plan lets you reap the full benefits of growth by allowing you to defer the payment of taxes until you are ready to retire. You should also look for investments that you can hold for an extended period of time to avoid paying additional taxes as you capitalize gains on a frequent basis. Public companies that transfer value to shareholders through retained earnings and share buybacks tend to give you the greatest tax advantages over the life of your portfolio.
2. Buy Investments That Match Your Goals
Investors often make the mistake of basing their portfolios on objective factors without considering their own personal needs. Stocks, for instance, yield high returns in the long run, but an investor who is only a couple of years away from retirement needs assets with low volatility. Likewise, an investor who is decades from retirement should focus on assets that offer a high risk premium since uncertainty tends to average out over an extended period of time. Investors who do not select investments aligned with their goals miss out on opportunities to maximize their wealth and face increased chances of failing to hit their objectives.
3. Account for Your Life Expectancy
Running out of money toward the end of your retirement can leave you with a low quality of life and dismal chances of bouncing back. You should structure your retirement assets to give you at least a 75 percent chance of enjoying a high standard of living on the last day of your life. If you want to avoid any risk of becoming a broke retiree, perpetuities and annuities can guarantee steady returns. Unbiased financial publications, such as Agora Financial, can help you to identify investments that minimize your risk in retirement while yielding consistent income.
4. Invest With an Understanding of Psychology
The market capitalization of entire industries can swing wildly based on the collective psychology of investors. New investments that attract a lot of attention, such as Internet stocks in the late 1990s or cryptocurrencies in recent years, can go through temporary periods of overvaluation as millions of retail investors pile in for a chance at quick riches. Sudden price fluctuations often account for the projected growth or decline of an asset, but rational investors can reap significant gains from market swings by accounting for psychological biases.
5. Adjust Your Gains for Inflation
Inflation has historically been about 2 percent per year for over a century, but many investors still fail to account for the declining value of money when planning their portfolios and measuring results. The compounded effect of inflation over the life of your portfolio can skew the accuracy of your estimates if you are not careful. In extreme cases, investors who failed to rely on competent advice when planning for retirement have depleted their funds prematurely when they did not account for inflation.
6. Avoid Investments That Everyone Recommends
In most areas of life, following norms can save you from making catastrophic mistakes. In the financial markets, however, normalizing your portfolio by following along with general trends is a sure way to lose money. Accounting for irrational pricing is the key to achieving success in the financial markets. You should ignore widespread beliefs about investing and, instead, focus on the unique insights that you have acquired in your own life to identify investments that are priced in an inefficient way. You can also gain a competitive advantage when choosing investments by conducting deep market analysis to discover gaps between prevailing prices and real valuations.
7. Never Invest on the Basis of Fear
Investors can make catastrophic mistakes when they base their decisions on fear. During the Ebola scare in 2014, for example, stocks for personal protective equipment skyrocketed to more than 10 times their original price. Investors who purchased PPE stocks at their peak lost most of their initial capital once prices returned to reality. Likewise, inexperienced investors who panic after discovering sunk losses often choose to liquidate securities that plummet in price, and there are professionals who thrive on buying up these trades at a discount. All market participants are subject to the same conditions, so you have to be fearless to avoid making mistakes when investing.
8. Plan for Market Crashes
Hubris can drive investors to place bets on market trends that are not guaranteed to be sustainable in the long run. During the Great Depression, investors who had heavily leveraged their portfolios lost most of their money when the persistent market growth they had bet on collapsed. You should always be prepared for market crashes by maintaining a diversified portfolio capable of leaving you in a position to recover when downturns arise. Hedging should also be employed to account for multiple market contingencies.
9. Avoid Investing on the Basis of Public News
The person who finds out about new changes first has been able to earn the greatest returns in the financial markets since the dawn of civilization. When the Internet first emerged, retail traders were able to earn high returns by trading based on news events. Today, however, computers powered by artificial intelligence adjust market prices for public information within seconds.
10. Stay on the Safe Side
Investors who rely on a diversified portfolio face low risks of experiencing crippling losses. In general, investors who lose everything focus on churning high-risk trades instead of building wealth based on long-term fundamentals. If you want to invest in your future in a sustainable way, make sure that your portfolio is aligned with timeless fundamentals. Seek to realize growth based on the inevitability of businesses earning profits and bonds yielding interest. Unless you are a financial professional, betting against fundamentals is a sure way to realize losses. Staying on the safe side will grow your wealth in a way you can rely on while protecting your financial future.