Good things come to those who wait, and although the original saying wasn’t speaking to investing, the same could be said about managing your money. When you let your investments mature, you can put yourself in a better position as you work towards your goals.
The problem is that it takes time. And in today’s headline driven society, even one sign of bad news can cause investors to abandon their long-term plans.
Think about long-term investments as a mindset and approach rather than an individual asset class. With a long-term investing strategy, you stay focused on realizing long-term gains even when short-term market volatility and your emotions pull you in the other direction.
Of course, that’s easier said than done. When the market tumbles, it’s natural to want to stop the bleed and sell losing assets. But remember, historically, the market tends to reward a long-term outlook: every market downturn in U.S. history has ended in an upturn.
Your goals can also help you avoid any knee-jerk reactions. Depending on where you are in life, your long-term goals may be 10, 20, or even 30 years in the future. Someone planning for retirement, for example, may have a few decades until they hit their goal of retiring. What happens in the market today will likely have no bearing on their investments in a decade.
What will impact them, however, is not staying the course. As the IRS puts it, “Since you'll need income for [retirement], it is important to make your money work for you.” You can only do that with time in the market — not timing the market.
And when in doubt, consider the tax and accounting definition of a long-term investment. The IRS classifies long-term investments as those you hold for at least a year, after which you pay long-term capital gains when selling if you have positive returns. In other words, you owe higher taxes when you sell before a year.
Here are five ways to realize years of potential benefits.
Before finding your “forever” investments, you need to get your financial house in order.
To do that, you have to first set up a budget. Start by listing out your income (the money you make) and expenses (the money you spend) for a typical month. That includes your take-home pay, your mortgage or rent payments, and even something as basic as your takeout costs.
With all this information, you can build the foundation of your budget. Subtract your monthly spending from your income. Ideally, you have money left over for saving and investing. If not, consider cutting back somewhere.
A good budgeting rule of thumb is the 50/30/20 rule. This suggests that you spend 50% of your income on needs, 30% on wants, and 20% on savings. For many people, the middle 30% is where they will find the most room to cut back.
After getting your budget in a good place, you should start thinking about your financial goals.
These can include things like paying down debt, saving for a rainy day, and retiring comfortably. You’ll probably have more than one goal, and that’s okay.
You’ll quickly find that you can’t achieve any of your goals by stuffing money under the mattress. Cash doesn’t have the same opportunity to grow that a long-term investment in the markets does, and over time, holding on to too much cash won’t put you any closer to where you want to be.
As a result, you should consider investing. But don’t hastily snatch up individual stocks you heard about on TV or read in the paper. Instead, think about building a diversified portfolio that matches your risk tolerance, time horizon, and goals.
To understand what that means to you, ask yourself a few questions.
What are my goals? You may want to save for a child’s college education or to buy a new home.
How long will it take me to reach my goals? College may be in 18 years but you want a new home in five.
How much risk am I willing to take to get there? Everyone reacts differently when the market and their portfolio falls.
Your answers to the above questions can inform what mix of stocks and bonds you’ll need to reach your goals and stay diversified.
A risk seeker with 30 years until retirement may hold an aggressive portfolio of predominantly stocks, whereas a risk averse person who wants to buy a house in five years might hold a more conservative mix of 60% stocks and 40% bonds.
When you spread your investments across multiple assets, you aim to reduce your risk exposure, smooth out returns in volatile markets, and improve your long-term performance.
Don’t worry if you don’t know how to get started.
Acorns recommends a diversified, expert-built portfolio based on the answers you give when you join. Keep these answers up to date in your Investor Profile!
Investors with a higher risk tolerance and more time in the market can opt for our aggressive portfolio. While it’s made up of stock-based funds, it’s still diversified, including international exposure — and not made up of just one stock or category.
Once you’ve created a budget and found a portfolio that fits your circumstances, stick with it. Remember, markets have historically rewarded long-term investors. When you intervene early and often, you risk derailing your long-term financial goals for a small chance at a short-term windfall.
That’s not to say your portfolio should look the same in year 1 and year 10. You will need to adjust your holdings as you inch closer to your goals. For example, a 30-year-old holding mostly stocks may want to end up with a more even mix of stocks and bonds as they close in on retirement.
Acorns can do this automatically. Make a one-time or recurring investment in an Acorns Later account and watch as your portfolio matures with you
Besides building and sticking to a strategy, you will want to understand what types of accounts are available to see out your long-term investments.
A few of the most common include:
Each of these accounts serves a different purpose. For example, a 401(k) and IRA are designed to help you save for retirement, whereas a 529 plan can help you save for your child’s education. Where they overlap is in their tax advantages. The three accounts give you a vehicle to grow your money tax-free until you reach retirement or pay for a qualified educational expense.
The benefits come with some limitations. Your assets are tied up in a 401(k) and IRA until you reach 59 ½ years old. And while there’s no age limit for 529 plans, you can only use those funds on qualified education expenses. Breaking any of these rules can lead to penalties from the IRS.
Not sure where to start? Try Acorns Later to automatically invest for retirement and get potential tax benefits.
As you finalize your investing options, you should also consider establishing an emergency fund — money put aside to cover or offset unforeseen expenses.
Most experts suggest saving three to six months of expenses for a rainy day. Your budget will inform that number but let’s rehash some expenses you might want your emergency fund to cover:
Housing (rent or mortgage)
Debt payments (such as student loan or credit card)
If you’re in a situation where you need your emergency fund, you’ll likely cut back on some discretionary spending, too. So you don’t necessarily need to plan on saving for entertainment, vacations, or other unnecessary expenses.
Investing involves risk, including the loss of principal. Past performance is not indicative of future results and no level of diversification or asset allocation can ensure profits or guarantee against losses. Acorns Later is an Individual Retirement Account (either Traditional, ROTH or SEP IRA) selected for clients based on their answers to a suitability questionnaire. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions.
This material has been presented for informational and educational purposes only. The views expressed in the articles above are generalized and may not be appropriate for all investors. The information contained in this article should not be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product. There is no guarantee that past performance will recur or result in a positive outcome. Carefully consider your financial situation, including investment objective, time horizon, risk tolerance, and fees prior to making any investment decisions. No level of diversification or asset allocation can ensure profits or guarantee against losses. Article contributors are not affiliated with Acorns Advisers, LLC. and do not provide investment advice to Acorns’ clients. Acorns is not engaged in rendering tax, legal or accounting advice. Please consult a qualified professional for this type of service.