By now, everyone knows that compounding is the path to long-term financial stability and being able to enjoy your retirement. Today, investors have many options for opportunities to take advantage of compounding to grow their wealth. The question is, How do you decide which investment is the right path to wealth for you?
Today’s Investment Options
Investing options today include some that are considered relatively safe, such as CDs, high-interest savings accounts, rental homes, and bonds. These investments are considered relatively low risk, but they also do not have as high of a return as some of the riskier investments. Investors can also choose to invest in individual stocks, treasury securities, REITs, and cryptocurrency. You also have some investments that are in between the two, such as mutual funds and exchange-traded stocks.
Choosing the Right One
Choosing the right investment for you depends on your goals, how soon you need the money, and your risk tolerance. This is especially important in times of economic instability and volatility. Everyone can invest when times are good and outcomes are more certain. Many investors will take that time to invest in individual stocks that have a promise of high returns even though they are riskier, but the challenge comes during times of economic instability.
The key question to ask yourself is at what point would you feel like selling everything to prevent a further loss? If you would sell all of your individual stocks at a loss when the market takes a 10% dip, then you might be better off either hiring a broker to manage your account or investing in less risky investments.
If you would not be tempted to move your money at even a 30% loss, then you are probably not cut out for playing speculative markets, the forex markets, cryptocurrency, and other similar investing instruments.
For many people, the right approach is somewhere in between. They will place a majority of their investments in a safe and secure place, but they will allow a small portion of their investments to be placed in riskier asset classes. It might be time to ask yourself at this point in your investing journey where you fall on the risk tolerance scale.
Staying the Course
Regardless of your investing style, the key to compounding successfully is to stay the course. Compounding is a long-term game, and if you are tempted to pull your money out too soon, you can negate any gains that you have earned up to this point.
The bottom line is that you have to choose an investment strategy that allows you to sleep comfortably at night without worrying about your money. The key is to know yourself and to choose investments that suit your personality.
One of the best tests of whether your portfolio is balanced in terms of risk is how much time you spend thinking and worrying about money. Some people might stay up late worrying about whether their portfolio will take a dip, while others will lose sleep because their portfolio is not making enough for them quickly enough.
The key to successful, long-term compounding is to find the sweet spot for you and the mix that allows you to check in with your portfolio occasionally but spend the rest of your time enjoying your life. If you do not feel that you are in this sweet spot right now, it might be a time to do an audit of your investments and see what changes you need to make so that you can get back to a feeling of safety and security about your money.