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Four Investing Concepts Everyone Should Know

When it comes to financial literacy, many Americans lack basic money-management skills. Yet, to achieve a secure retirement and accomplish other financial goals along the way, it couldn’t be more important to at least have a general understanding of the basics. Here are four tips that can help you better understand the often intimidating investment jargon:

1. Start Early.

Nothing may be more important than the power of compounding over time—but only if you start investing early. Compounding rewards you for not only the actual dollars you invest but also on what those dollars earn.

Waiting just ten years to begin investing can cause you to miss out on some big savings opportunities. For example, if you invested $5,000 every year starting at age 25 up until you retire at 65 (a total contribution of $200,000 over 40 years), thanks to compounding, history shows you could end up with almost $1.1 million in savings at an average annual rate of return of 7%. Yet, if you instead start investing at age 35 up until retirement at 65 (contributing a total of $150,000 over 30 years), because you missed that first decade, the math shows you’ll historically end up with only about $500k—all because your investment had less time to allow interest to compound.*

2. Diversification Helps Reduce Risk.

Diversification means utilizing a variety of investments to minimize risk. You can certainly invest in just one company’s stock, but relying on a single company to grow your investment portfolio is as risky as it gets. For example, imagine if you put all of your savings into a single company’s stock—and then a few months later, that company suffers a PR nightmare and their stock plummets. This is the epitome of putting all your eggs in one basket.

Mutual funds and exchange traded funds (ETFs) are investments that can help you achieve diversification, as each allows you to buy a collection of stocks, bonds or other securities as opposed to investing in one individual company at a time. While there is no guarantee, diversification is one of the most important components required to obtain your long-term financial goals.

3. Take the Emotion out of Investing.

Even the most seasoned investors cannot time the market. Panic often arises when the market dips and many investors end up selling at lows, rather than riding out a weak period and waiting for the market to recover. By setting up automated, recurring deposits into your investment account, you can remove the chance of making poorly influenced, short-term, emotionally fueled decisions.

Think about it: If you have a 401(k), then you’re probably using this strategy. By contributing a set percentage of your paycheck to your 401(k) every other week, you’re already making automated deposits, regardless of how the market is doing. This is an investing concept called “Dollar Cost Averaging” and a great strategy that eliminates emotional investing, which can be a losing strategy.

4. Not Investing May Cause You to Fall Behind.

While many people are intimidated by the inevitable risks associated with the stock market, letting your savings sit in cash could actually result in losing money, too. Over the years, inflation will likely outpace the little amount of interest you’re able to earn on a standard savings account. So being too fearful to invest is also a problem.

Fortunately for conservative investors, there are many investment strategies that can be utilized to pare back risk. Your personal risk tolerance is influenced by a number of factors, such as your age, goals and timeframe. When calculating risk tolerance, there isn’t a one-size-fits-all answer. Having a strong understanding of your personal financial situation can help lead to wise investment decisions.

Take the opportunity to get a grasp on your personal finances now. If you’re not sure where to start, the experienced team of Advisors at Jemma Financial is here to help. Investing doesn’t have to be complex, and you certainly don’t need to be a millionaire to begin. In fact, there is no account minimum needed to become a Jemma Financial client.

*This is a hypothetical example that assumes a 7% annual return and not intended to reflect the actual performance of any specific investment. Earnings are pretax, and may be subject to income tax when distributed. Source: NerdWallet

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