Make Investments Work as Hard as You Do
Labor Day is almost here. Of course this year, the holiday may have a different impact, given employment-related stress and disruptions stemming from the coronavirus. Yet it’s good to recognize the value of work and its importance in achieving your life’s goals. If you’re going to retire comfortably and reach your other financial objectives, you also need to invest — and your investments need to work as hard as you do.
To help make this happen, you need to know why you’re investing in the first place. You likely have a variety of financial goals, including short-term ones — a long vacation, a new car — and long-term ones, such as a comfortable retirement and the desire to leave a legacy for your family.
But you can’t invest in the same way for these goals. For example, when you’re planning an overseas vacation for next year, you want a certain amount of money to be available at a certain time, so you’ll want an investment that offers a high degree of preservation of principal. However, when you’re saving for a retirement that may be decades away, you need to consider investments that offer growth potential. In any case, you can help your investments work efficiently for you by matching them with specific goals.
You also want to keep your investments “on the job.” In the immediate aftermath of large market downturns like we saw earlier this year, many people simply stopped investing altogether. But taking a “time out” can be costly. For one, when you stop adding to your investment portfolio, you reduce its growth potential. Furthermore, if you’re on the investment sidelines, you might miss out on the next market rally — and the biggest gains often happen in the early stages of these rallies.
Not everyone abandons the investment world following a downturn, though. Some people just put more money into cash and cash equivalent accounts. And while it’s a good idea to have enough cash on hand for emergencies (about three to six months’ worth of living expenses), you may not want to have cash as the major component of your portfolio. Cash doesn’t “work” hard enough in the sense of providing you with long-term growth opportunities.
So, whether the markets are moving up, down or sideways, it’s important to keep investing and keep a reasonable percentage of growth-oriented investments in your portfolio, with the exact amount depending on your goals, risk tolerance and time horizon. These investments will fluctuate in value, but the longer you hold them, the more the impact of short-term drops may be reduced, especially if you maintain a diversified portfolio.
Finally, here’s one other step you can take to help keep your investments working hard: Check up on them periodically. Review your portfolio at least once a year to determine if it’s still helping you make progress toward your goals. If it seems like you’re falling behind, you may need to adjust your investment mix.
Kevin Chancellor is a licensed financial advisor who manages the Palm Bay branch of Edward Jones. He specializes in helping individuals, families, and business owners in the areas of retirement planning, tax savings, estate considerations, and education savings. He has served as board chair for the Greater Palm Bay Chamber of Commerce and works with various charities throughout the county.
Read more articles in our digital magazine.