Investing is not about “playing the market” or “getting rich.” It’s crucial to reaching financial well-being. That entails being able to satisfy the demands of others who rely on you, as well as your own. It also entails setting and achieving objectives that extend beyond the ability to make ends meet and pay off obligations such as credit card debt, mortgages, and school loans.
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Even in times when the financial markets appear unfriendly, you may attain financial wellness and improve your investment success by following these 6 steps.
1. Make a plan first.
At Fidelity, we think that the basis for successful investing may be laid by developing a financial plan. You may evaluate your current circumstances, establish your objectives, and choose workable methods to reach them with the aid of the financial planning process.
Budgeting doesn’t have to be elaborate or costly. A financial advisor or an online tool such as those available in Fidelity’s Planning & Guidance Center can assist you in doing this. In any case, creating a strategy based on sensible financial planning guidelines is a crucial first step.
One service that financial advisors usually provide to their customers is a plan.
2. Adhere to your plan, even if the markets don’t seem favorable.
It’s normal to desire to flee when the value of your assets declines. The best investors, however, do not. Rather, they continue to own a portion of equities that they can afford to hold in both strong and weak markets.
During the late 2008 and early 2009 financial crisis, it may have looked wise to seek shelter in cash. However, individuals who continued to participate in the stock market throughout that time were significantly better off than those who withdrew from it, according to a Fidelity survey of 1.5 million workplace savings.
Those that continued to invest experienced a 147% increase in their account balances in the ten years that followed the crisis, which represented the effects of their contributions and investing decisions. That is more than twice the typical 74% return for stock market fleecy investors had in the last quarter of 2008 or the first quarter of 2009. While the majority of investors did not alter their strategies during the market collapse, those who did made a crucial choice that would have a long-term effect. More than 25 percent of stock sellers never returned to the market, missing out on the ensuing gains.
Recall that feeling nervous during a stock market decline is a typical reaction to volatility. Maintaining consistency in your long-term investment mix and having sufficient growth potential are critical for reaching your objectives. If the ups and downs of your portfolio are too much for you to handle, think about sticking with a less volatile mix of investments.
3. Learn to save instead of spend.
Even while it’s simple to be sucked into the market’s ups and downs, it’s crucial to consider how much of your money you are setting aside for the future. Making headway toward long-term financial objectives can be facilitated by saving early and frequently.
Fidelity advises setting aside at least 15% of your salary, plus any employer match, for retirement as a general guideline.2. Naturally, that figure is only a starting point; certain individuals will have a lower figure and others a greater one. Nevertheless, there is proof that starting sooner and conserving more money enable people to achieve their long-term objectives. Fidelity polls hundreds of Americans who have begun retirement savings every two years. The findings are tallied to provide the nation with a score that indicates, in general, the level of retirement readiness among Americans. America’s retirement score dropped from 83 in 2020 to 78,3 in 2023. This indicates that the average individual who is saving for retirement will be able to pay for 78% of their living expenditures when they retire.
In the 2023 Retirement Savings Assessment poll by Fidelity, the median savings rate across all age groups and income levels was 10%.
Raising the national average savings rate to 15% in America might result in a 10 point increase to 88, a firmly positive number.
Conversely, the typical score for an individual who saves less than 10% was 68. All age groups that were committed savers had better median scores, but younger savers who had more time to save over their careers had the biggest changes.
4. Experiment
Diversification—holding a range of stocks, bonds, and other assets—is seen by Fidelity as a fundamental component of successful investment since it may help manage risk.
Having a portfolio that offers growth potential and a reasonable amount of risk, based on a proper investment mix, may help you stay committed to your strategy even when the market fluctuates.
Although diversification cannot ensure profits or prevent losses, it does try to offer a fair trade-off between risk and reward. It is possible to diversify not just between stocks, bonds, and cash, but also within each of those asset classes. Think about spreading your stock exposure among different industries, geographical areas, investing types (growth, value, and mix), and company sizes (small-, mid-, and large-cap stocks). When buying bonds, try to spread your investment over a variety of issuers, maturities, and credit grades.
Investors with an appropriate asset mix appear to be better prepared for retirement, according to Fidelity’s Retirement Savings Assessment. According to Fidelity’s 2023 assessment, investors may improve their retirement preparation by swapping out portfolios that seem too aggressive or cautious for ones that are age-appropriately allocated.
5. Take into account inexpensive investment options that are well-worth it.
Although they can’t control the market, astute investors understand that they can manage expenses. Funds with lower cost ratios have historically had a better possibility of outperforming other funds in their category—in terms of relative total return and prospective risk-adjusted return ratings—though this is by no means a given, according to a study by independent research organization Morningstar®.
6. Remember to file your taxes.
Keeping an eye on taxes and account kinds is another practice that might aid investors in becoming successful.
Higher after-tax returns may be produced via tax-benefiting accounts such as 401(k)s, IRAs, and some annuities. Investors refer to this as “account location”; the quantity of money you invest in various account types should be determined by the tax treatment of each kind of account. In the context of investing, “asset location” refers to the practice of placing different kinds of investments in different kinds of accounts according to the tax efficiency of the investment and the tax treatment of the account type.
Taxes should never be the only factor in your investing selections, but you might want to think about placing your least tax-efficient assets in tax-deferred accounts like 401(k)s and IRAs (taxable bonds, for instance, whose interest payments are subject to relatively high ordinary income tax rates). On the other hand, taxable accounts are normally better suited for more tax-efficient investments, such as municipal bonds, which typically have interest free from federal income tax, and low-turnover funds, such as index funds or many ETFs.