Small Steps for Successful Investing

December 2021

Barbara O’Neill, Ph.D., CFP®
Distinguished Professor and Extension Financial Management Specialist Emeritus
Rutgers Cooperative Extension

Some people have recently started to invest for the first time. Others have been investing money for decades through their employer retirement savings plan or on their own. Regardless of whether you are a “newbie” or a seasoned investor, there are time-tested investment strategies that have been proven to produce positive investment returns over time.

Below are ten small steps for successful investing:

1. Develop an “Investor’s Mindset”- Expect the unknown when switching from savings products (e.g., money market accounts and certificates of deposit, a.k.a., CDs) with fixed returns to investments (e.g., stocks and growth mutual funds) where returns are unpredictable and variable. Savers can expect no loss of principal and regular (albeit currently very low) interest payments. Investors must accept a potential loss of principal and irregular payouts.
2. Determine Your Time Frame- Match the time frame of financial goals to investment characteristics. Stocks have historically outperformed other investments over long time periods and are recommended for long-term goals like retirement. On the other hand, stocks are volatile and often lose value during short time frames. If a financial goal is less than 3–5 years away, select alternative investments such as Treasury securities, a money market account, or CDs.
3. Dollar-Cost Average Investment Purchases- Make regular investment deposits at regular time intervals, such as $100 per month in a mutual fund or 5% of pay every payday in an employer 401(k) or403(b) plan. Doing so will reduce the average cost of share purchases over time. Mutual funds and stocks with a dividend reinvestment plan (DRIP) or direct stock purchase plan (DSPP) are well-suited for dollar-cost averaging.
4. Take Advantage of Tax-Deferred Investments- Set up investment accounts for retirement savings where earnings can grow free of tax for decades until required minimum distributions (RMDs) must begin at age 72. Examples include traditional individual retirement accounts (IRAs), tax-deferred employer retirement plans (e.g., 401 (k), 403(b), and TSP), and SEPs (for self-employed workers).
5. Review Your Investment Risk Tolerance- Consider how much loss of investment principal (e.g., 20%) you could withstand without losing sleep. To assess your personal preferences, take the risk tolerance assessment from the University of Missouri to determine whether you are a conservative, moderate, or aggressive investor.
6. Know Your Limits- Never invest in securities that you do not fully understand or feel comfortable with. If you can’t explain how an investment works in simple terms to a friend, you probably don’t understand it very well yourself. Take a pass and never let anyone talk you into investing beyond your knowledge level or comfort zone.
7. Consider Tax-Exempt Securities- Select municipal bonds or bond funds if they provide a higher after-tax return than taxable securities. Divide the available tax-exempt rate by1 minus your tax bracket (e.g., 24%). This provides its taxable equivalent. For example, a 2% tax-exempt bond provides the equivalent of 2.63% (2 divided by .76) to persons paying income taxes at the 24% marginal tax rate.
8. Diversify Your Investment Portfolio- Purchase different types of investments (e.g., stocks, bonds, cash equivalent assets) or shares of mutual funds or exchange-traded funds (ETFs) that contain many securities. Broadly diversified index funds that track a stock market index, such as the S&P 500 or Wilshire 5000, are another good option.
9. Increase Your Investment Knowledge- Read periodicals like Kiplinger’s Personal Finance and The Wall Street Journal. Other good financial information sources include workplace seminars, blogs, podcasts, websites, certified financial planner® professionals, adult education courses, radio and television shows, and investment clubs.
10. Review and Rebalance- Read reports on the performance of your investments and replace poor performers, as needed. Rebalance portfolio asset class weights to their target levels (e.g., 50% stocks, 40% bonds, 10% cash assets) periodically. Consider repositioning assets when financial goals are achieved or to adjust to changes in the economy, tax laws, or personal circumstances (e.g., unemployment, divorce, or widowhood).

For additional information about investing and common types of investments, review the Cooperative Extension Investing for Your Future course and/or the FINRA Investor Education Library.