Even the mainstream news is covering the wild growth in the glitziest names in the Technology sector—the FAANG stocks—Facebook, Amazon, Apple, Netflix and Google. And while some of these shiny names are definitely worth owning, you still need to understand what you’re doing when investing. The point is not to get in the market and take the biggest risk, gambling that you’ll win big. Investing is about growing your assets faster than inflation so that you have money for your future.
A majority of investors begin with their 401(k) or company-sponsored retirement plan. Savings added to these plans are not taxed now, grow tax-deferred, and are eventually taxed when distributions are made. When you defer money from your paycheck to your retirement plan, many companies will match your contribution up to a specified percent. That’s basically free money.
However, investing doesn’t end there. While a 401(k) is a solid start, you cannot touch retirement funds until age 59½. You may also want to save for other goals. This is when you need to understand who you are as an investor. We often say no two situations are the same, even when starting out. Your goals and risk tolerances will shape your investment style.
Unlike your 401(k), a brokerage account or an IRA can have nearly unlimited investment choices. We recommend first understanding the various asset classes and how they work. Stocks represent ownership in a corporation. You earn money in two ways: price appreciation, when the share price increases and you’re able to sell your shares for more than you purchased them, and dividends, which are company profits paid to shareholders. Dividends are often paid by mature, profitable companies, while rapidly growing companies tend to invest their cash back into the company.
The idea is to own a little bit of both. When your own cash is tight, you might not rush out to buy the latest iPhone, but you will continue to pay the electricity bill to keep your lights on. This example also shows the negative correlation between sectors. When one sector of the market has a downturn, typically another sector remains either stable or goes up. However, for beginning investors, it can be difficult to diversify with small savings, so you may consider exchange-traded funds or mutual funds. These allow you to buy a stock portfolio and shift the research and allocation decisions to an experienced money manager.
A diversified portfolio should include securities from various asset classes, including variations in geography (domestic stocks vs. international stocks), market capitalization (Small-cap vs. Large-cap) and style (value vs. growth). Just keep in mind that diversification only works when there is low correlation.
As your portfolio grows and you get closer to reaching a goal and needing your money, you may want to shift your assets into a less volatile asset like bonds, which can help you protect principal. Bonds are debt securities issued by various governments and corporations to raise money to fund any number of projects. In most cases, bonds pay a periodic interest payment, and at the end of the defined life of the bond, or at maturity, the issuer returns the principal amount to the holder. Bonds provide a predictable stream of income that other investments such as stocks may not.
The final tip for beginning investors is to rebalance your portfolio. As some assets grow and others decline, your desired allocation will skew, inadvertently changing your portfolio. Rebalancing involves restoring your portfolio to its intended strategic asset allocation by shifting your funds among investment categories to regain the ratios you decided on when you first designed your portfolio. It can easily be done by trimming or selling positions that have grown too big and buying positions that have decreased or didn’t increase as much.
If you have questions regarding your portfolio construction, the experts at Henssler Financial will be glad to help:
- Experts Request Form
- Email: experts@henssler.com
- Phone: 770-429-9166.
This article is for demonstrative and academic purposes and is meant to provide valuable background information on particular investments, NOT a recommendation to buy. The investments referenced within this article may currently be traded by Henssler Financial. All material presented is compiled from sources believed to be reliable and current, but accuracy cannot be guaranteed. The contents are intended for general information purposes only. Information provided should not be the sole basis in making any decisions and is not intended to replace the advice of a qualified professional, such as a tax consultant, insurance adviser or attorney. Although this material is designed to provide accurate and authoritative information with respect to the subject matter, it may not apply in all situations. Readers are urged to consult with their adviser concerning specific situations and questions. This is not to be construed as an offer to buy or sell any financial instruments. It is not our intention to state, indicate or imply in any manner that current or past results are indicative of future profitability or expectations. As with all investments, there are associated inherent risks. Please obtain and review all financial material carefully before investing. Henssler is not licensed to offer or sell insurance products, and this overview is not to be construed as an offer to purchase any insurance products.
