The new year is a time when many people find themselves setting goals and resolutions for the months ahead. It’s also a great time to create smart investing habits that will benefit you not just for next year, but possibly for the rest of your life.
To help you on your investing journey, we spoke with two investment experts to discuss smart investing habits you can implement in 2022. Whether it’s setting specific goals, diversifying your wallet or focus on the long term, these habits can help you achieve your short and long term goals. long-term financial goals this year.
have a plan
One of the most important aspects of investing is setting specific financial goals and then putting a plan in place to achieve those goals. In fact, if you sign up with a robo-advisor or meet with a financial planner, the first thing you’ll be asked to do is answer questions about your goals.
One of the reasons for having specific investment goals is that they can be reverse-engineered to ensure you meet them.
Take retirement, for example. Once you’ve set a goal for when you want to retire and how much you want to spend each year in retirement, you can figure out how much dollars you’ll need to retire comfortably, as well as how much amount you will need to invest per month to achieve this ultimate goal. The same concept can be used to determine how much you should save monthly for any financial goal.
When it comes to investing, start with the end in mind. Knowing your short-term and long-term financial goals can help you create and stick to a financial plan and help you build a diversified portfolio tailored to your specific goals.
According to Sara Stolberg Berkowicz, CFP and assistant professor at the College for Financial Planning, mental accounting is another reason why setting specific goals is so important.
Mental accounting, a concept made famous by economist Richard Thaler, is the idea that people tend to mentally separate their money into different buckets. We think of money in our checking account for expenses, money in our savings account for savings, and so on.
“When we buy coffee in the morning, we don’t take money out of our IRA to do it — we use our debit or credit card,” Berkowicz said. “It’s how we think about money, and so we can use mental accounting to help us save for financial goals.”
We can take advantage of this idea of mental accounting to achieve our financial goals. When you save for a particular goal and leave that money in your checking account, it’s easy to spend it on something else. But what if that money is in an entirely different account? You can still easily access the money, which means there’s nothing inherently stopping you from spending it. But just by putting it in an account designated for that financial goal, you’ve used mental accounting to reduce the likelihood that you’ll spend it.
If you’re having trouble transferring money to your savings or investment accounts, consider automating your finances. For example, you can set up an automatic transfer from your checking account to your savings account on the first of every month to help you build your emergency fund – or from your checking account to an Individual Retirement Account (IRA) to help you save for retirement.
By automating your finances, you increase your chances of achieving your goals. You don’t rely on your willpower or motivation to save every month. Instead, technology has taken care of it for you. And after a while, you probably won’t miss that extra money in your checking account.
Save a higher percentage of income
There is no absolute rule as to what percentage of your income you should invest.
Remember that the percentage you should save depends on your annual income, your age today, the age at which you plan to retire, and your desired annual income during retirement. For example, someone pursuing FIRE – or financial independence, early retirement – will need to save a much higher percentage of their income now than someone planning to retire at age 65.
When asked what percentage of income he recommends investors save each month, Ryan Klippel, financial planner at Optas Capital, said at least 20% of your net income. This 20% can include money contributed to your retirement accounts, as well as money contributed to cash reserves and taxable brokerage accounts to save for short-term and long-term goals. When deciding how much of your savings should go into retirement accounts, Klippel reminds investors to take advantage of any benefits offered by their employer.
“For your retirement goals, make sure you take full advantage of your employer match. If it’s offered, it’s basically ‘free’ money,” Klippel said.
Not sure how to achieve that 20% savings rate? The popular 50/30/20 budgeting method breaks down the percentage of your income that should be spent on financial wants, needs, and goals. This can help you identify areas of your budget where you’re overspending so you can allocate more money to savings.
Diversify your investments
If you’re familiar with investing, you’ve probably heard the advice to diversify your investments. But what does that really mean?
Diversification is when you have spread your money over many different investments. For example, rather than just investing in stocks, you also have money in bonds, cash, and possibly alternative assets. And instead of investing only in stocks of a single company or industry, you invested in many companies in various industries.
“The goal is to prevent a single holding from making or destroying your financial success, as concentrated positions can exacerbate volatility,” Klippel said.
When diversifying your portfolio, Klippel recommends including both domestic and international holdings. Like many financial experts, Klippel suggests that exchange-traded funds and mutual funds are a way to start diversifying your investments early on.
“Nowadays it’s quite common to be able to buy fractional ETF shares,” Klippel said. “So even if you don’t have a lot of money to invest, you can get exposure to global stock and bond markets.
Limit your risks
Investing is inherently risky. In the case of the stock market, you risk losing money when a particular company, a particular sector, or the entire market goes down. Even so-called safe investments like cash and government bonds carry some risk. In this case, you run the risk that your investments will not keep pace with inflation, which means that your money will lose value.
Fortunately, as an investor, there are many ways to reduce the risk in your portfolio. One of the most important tactics is, as we discussed earlier, to diversify your portfolio. But it’s also important to be careful about what you add to your portfolio in the first place.
Over the past two years, cryptocurrency and day-trading strategies have caught the public’s attention, leading many investors to wonder if they should add them to their portfolios. Unfortunately, these types of investments can be highly speculative and are more like gambling than long-term investing.
That doesn’t mean you can’t include them in your portfolio, according to financial experts.
“If they have the capacity for risk and the tolerance for risk, there’s no reason why they shouldn’t view these types of investments as similar to any other game they might play with their money,” Berkowicz said. “Some people go to the track or bet on sports. There are many types of gambling, including investing in cryptocurrency and other high-risk investments.
If you choose to invest in some of these high-risk investments, make sure your other financial ducks are lined up. Pay off high-interest debt, make sure you have fully funded emergency savings, and contribute enough to a diversified retirement account to meet your retirement goals. Finally, only take these risks with money you can afford to lose. Experts recommend that no more than 5% of your investment portfolio be in high-risk assets like crypto.
“Yes [investors] do that, make sure it’s not money that they need for living expenses or that would affect the time horizon to achieve their financial goals,” Berkowicz said.
As a new investor – or even a seasoned investor – it can be easy to check your accounts too often and panic when they seem to be going in the wrong direction. For this reason, financial experts recommend avoiding checking your balances every day. According to Klippel, once a month or quarterly is more than enough for your 401(k) plan.
“It’s also important to realize that if you regularly contribute to your investment accounts, such as your 401(k) with every paycheck, you can actually benefit from market volatility as you buy more stocks when the stock price is low compared to when it’s high,” Klippel said. But don’t invest only when the market is low. Keep investing because time in the market is more important than anything.
It’s easy to feel overwhelmed by stock market volatility, and it leads many inventors to make emotional decisions. But remember, the stock market has rebounded from every correction and downturn so far and hit new highs. There is no reason to think that this will not be the case in the future.
“Remember the old adage: it’s how long you’re in the market, not when it’s happening, that’s the important ingredient to achieving your financial goals,” Klippel said.