Money Matters
presented by: Vision Financial
While there is no guarantee that any investment strategy will be successful and all investing involves risk, here are five basic principles that may help you invest more successfully.
- Long-term compounding can help your nest egg grow. It’s the “rolling snowball” effect. Put simply, compounding pays you earnings on your reinvested earnings. The longer you leave your money at work for you, the more exciting the numbers get. For example, imagine an investment of $10,000 at an annual rate of return of 8 percent. In 20 years, assuming no withdrawals, your $10,000 investment would grow to $46,610. In 25 years, it would grow to $68,485, a 47 percent gain over the 20-year figure. After 30 years, your account would total $100,627.
- Endure short-term pain for long-term gain and consider liquidity in your investment choice. Riding out market volatility sounds simple, doesn’t it? But what if you’ve invested $10,000 in the stock market and the price of the stock drops like a stone one day? On paper, you’ve lost a bundle, offsetting the value of compounding you’re trying to achieve. It’s tough to stand pat. There’s no denying it–the financial marketplace can be volatile. Still, it’s important to remember that the longer you stay with a diversified portfolio of investments, the more likely you are to reduce your risk and improve your opportunities for gain. If you’ll need the money within the next one to three years, you may want to consider more liquid investments such as certificates of deposit, savings accounts, short-term bonds or a money market account.
- Spread your wealth through asset allocation. Asset allocation is the process by which you spread your dollars over several categories of investments, usually referred to as asset classes. A basic asset allocation would likely include at least stocks, bonds (or mutual funds of stocks and bonds), and cash or cash alternatives. There are two main reasons why asset allocation is important. First, the mix of asset classes you own is a large factor-some say the biggest factor by far-in determining your overall investment portfolio performance. Second, by buying different asset classes you can minimize market volatility while maximizing your chances of return in the long term.
- Dollar cost averaging: investing consistently and often. Dollar cost averaging is a method of accumulating shares of stock or a mutual fund by purchasing a fixed dollar amount of these securities at regularly scheduled intervals over an extended time. When the price is high, your fixed-dollar investment buys less; when prices are low, the same dollar investment will buy more shares. This should result in a lower average price per share than you would get buying a fixed number of shares at each investment interval.
- Buy and hold, don’t buy and forget. Unless you plan to rely on luck, your portfolio’s long-term success will depend on periodically reviewing it. Economic conditions or your circumstances may have changed and your asset allocation should reflect these changes. Review your portfolio periodically to see if you need to return to your original allocation.
–Mike Mungenast, Sr. Vice President, Senior Advisor
Vision Financial Group
4505 Pine Tree Circle, Birmingham, AL 35243
205-970-4909, www.vision-financialgroup.com
Investment advisory services offered through Investment Advisors, a division of ProEquities, Inc., a Registered Investment Advisor. Securities offered through ProEquities Inc., a registered broker-dealer and member of FINRA and SIPC. Vision Financial Group, Inc. and West Alabama Bank are independent of ProEquities, Inc. Securities and insurance products offered are not bank deposits, have no bank guarantee, are not FDIC insured, and may lose value
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