What does the term "financial freedom" mean to you? For some, it means freedom from a particular workplace or industry. For others, it means the opportunity for an early retirement or the ability to start a long-desired business. Consider these three strategies that may help investors pursue financial independence this season.
The power of compounding might be significant—the more you invest sooner, the longer there is for the compounding effect to help. In general, having more time invested in the market helps manage day-to-day volatility and possibly major recessions. If your retirement is not for another 20 or 30 years, a recession may be good news for your investments, as it may allow you to invest funds in long-term assets at historically-low prices.
Accurately Assess Your Risk Tolerance
Suppose your investments lose 40% of their value; what might you do? Are you content to let them ride (after researching the stability of the underlying assets), or would you be tempted to go to cash for a while?
Everyone's risk tolerance is different. It is crucial not to invest beyond your tolerance. For some, this means an aggressive portfolio that includes mostly stocks. For others, this may mean bonds, Treasurys, and other assets. There is no wrong answer, but forcing yourself to invest more than you are comfortable with or in assets you are not comfortable with could set you up to make unwise knee-jerk decisions the next time there is market volatility.
Build Your Desired Portfolio
Many investors subscribe to the "lazy" portfolio method—a set-it-and-forget-it mix of index funds or exchange-traded funds (ETFs) that follow a particular index. For example, many ETFs and index funds follow the major market indices, including the Dow Jones, the NASDAQ, the S&P 500, and the Russell 2000. By investing in these broader funds, you might diversify your portfolio without the effort of researching, picking, and following individual stocks.
There are several advantages to the lazy portfolio approach, including:
- Instant diversification
- Relatively low fees
Though you need to monitor your investments regularly, you do not need to research particular stocks or companies in-depth to feel confident about the investments. The major market indices automatically rebalance—for example, if a company underperforms and no longer has the market cap requirements for the S&P 500, it is cycled off the list and replaced with a new company.
Your financial professional works with you to evaluate your risk tolerance and then can help you choose a basket of assets for your portfolio.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial professional prior to investing.
Investing involves risks including possible loss of principal. No investment strategy or risk management technique can guarantee return or eliminate risk in all market environments. All indexes are unmanaged and cannot be invested into directly.
An investment in Exchange Traded Funds (ETF), structured as a mutual fund or unit investment trust, involves the risk of losing money and should be considered as part of an overall program, not a complete investment program. An investment in ETFs involves additional risks such as not diversified, price volatility, competitive industry pressure, international political and economic developments, possible trading halts, and index tracking errors.
There is no guarantee that a diversified portfolio will enhance overall returns or outperform a non-diversified portfolio. Diversification does not protect against market risk.
Rebalancing a portfolio may cause investors to incur tax liabilities and/or transaction costs and does not assure a profit or protect against a loss.
Dow Jones Industrial Average (DJIA): A price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry.
The NASDAQ-100 is composed of the 100 largest domestic and international non-financial securities listed on The Nasdaq Stock Market. The Index reflects companies across major industry groups including computer hardware and software, telecommunications, retail/wholesale trade and biotechnology, but does not contain securities of financial companies.
S&P 500 Index: The Standard & Poor's (S&P) 500 Index tracks the performance of 500 widely held, large-capitalization US stocks.
The Russell 2000 Index is an unmanaged index generally representative of the 2,000 smallest companies in the Russell Index, which represents approximately 10% of the total market capitalization of the Russell 3000 Index.
This article was prepared by WriterAccess.
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