Before you start investing, you need to know why you’re investing. Different goals necessitate different investing strategies.
For example, someone who wants to preserve their capital and draw some income from it may opt for a more conservative portfolio, focusing on less-risky companies or investing in bonds.
Someone who wants to grow their nest egg over the long term, perhaps to build retirement savings, will likely want to invest in stocks that have higher return potential.
Your timeline for investing also plays a significant role in your investment strategy. If you’re a young professional and saving for retirement, you can handle the volatility that comes with investing in high-risk, high-reward stocks. As long as you earn strong, positive returns in the long term, it’s not a huge problem if your investments lose 50% of their value in a bad year.
Someone who is saving for a near-term goal, such as paying for a teenage child’s college, will want to construct a less volatile portfolio. Instead of investing in small, risky companies, they might invest in blue-chip stocks, bonds, or even CDs.
In general, investing should be a long-term endeavor. There are three primary factors that influence how much your portfolio will grow:
- The amount you invest
- The annual return of your portfolio
- How long you leave your money invested
Building a diversified portfolio can help reduce your risk and keep your portfolio growing over the years. That means that the longer you keep your money invested, the larger your investment portfolio will grow.