**Best Practices for Every Investor**
Many Americans are sadly unprepared for retirement, with almost one-third having no savings at all and nearly half not even thinking about saving. Shockingly, 21% believe the best way to save for retirement is by winning the lottery. Clearly, this is not a realistic strategy.
According to the 2014 Wells Fargo Middle-Class Retirement study, 68% of respondents found saving for retirement harder than anticipated. Here are six simple rules to make long-term investing easier and help you achieve financial independence, whether you’re a seasoned investor or just starting out.
**Start Saving Early and Let Compounding Work for You**
Albert Einstein once said, “Compound interest is the eighth wonder of the world. He who understands it, earns it; he who doesn’t, pays it.” Starting to save as early as possible allows your money to grow significantly over time due to compounding interest. For instance, someone who saves $100 per month starting at age 20 will end up with much more than someone who starts at age 30, even though the second person saves for just ten fewer years.
**Invest in Index Funds Instead of Trying to Beat the Market**
It’s better to aim to match the market’s performance rather than try to beat it. Index funds, which are passively managed, aim to replicate the market’s performance. Over the long term, it’s extremely difficult to outperform the market without taking on substantial risk. In fact, a large percentage of actively managed funds fail to beat the market and often charge higher fees. By choosing index funds, you avoid these extra costs and increase your chances of matching the market’s returns.
**Avoid Timing the Market—Buy and Hold Instead**
Data shows that the average investor only achieves an annual return of 3% to 5%, much lower than the market’s historical average of 8.5%. This discrepancy is often due to emotional investing—reacting to market highs and lows rather than sticking to a long-term strategy. The best approach is to buy and hold investments over time, resisting the temptation to react to short-term market fluctuations.
**Don’t Chase Returns—Markets Revert to the Mean**
Over the long run, stock returns generally revert to the mean, meaning they will average out to historical norms. What’s hot today may not be tomorrow, so it’s important not to blindly follow the crowd. Emotional investing and chasing returns can lead to buying high and selling low, which is not a winning strategy. Instead, stick to your long-term investment plan.
**Minimize Expenses by Investing in Low-Cost Index Funds**
One reliable indicator of future returns is low fees. Numerous studies have shown that funds with lower expense ratios tend to provide better returns over time. When selecting funds, prioritize those with lower costs.
**Stay Diversified and Follow a Plan**
Diversification helps lower risk without reducing expected returns. It can protect your investments from the failure of any single asset or sector by spreading your money across different types of investments. However, it won’t protect against a market-wide downturn. Diversify across various asset classes, sectors, and regions according to your personal investment goals and timeframe. Avoid emotional decisions, ignore the crowd, and stick to your long-term strategy.
Follow these principles to set a solid foundation for your investment plan and work steadily towards financial independence. Turn off the financial news, stay disciplined, and let your money grow wisely.