Investing is a discipline that all individuals must address if they are to have any chance at planning for financial security in the future. The law of compounding over time is the central theme of any long-term strategy, but the investor must also learn that rewards only come from mitigating risks that arise from the investment vehicles of choice.
For some unknown reason, the basics of prudent investing are never taught during our time spent during structured education. Depending on the direction taken with university level courses, we may touch on the time-value of money and a few investment highlights, but the average investor usually learns through trial and error, not the best approach since errors can translate into material financial losses.
Planning for retirement for most includes social security, additional savings along one’s lifetime, and the equity in one’s home if it were not used for our children’s education. In today’s reality, home equity may have been eliminated from the equation for at least a decade or more. Our real estate industry has a foreclosure pipeline exceeding eight years in length, and a rebound in significant value appreciation may have to wait until years later after the market stabilizes.
Within these constraints, what are a few tips for prudent retirement planning? To begin with, any recommendations must be adjusted depending on your individual time horizon for investing. Baby-boomers in their fifties have less time than those in their twenties. Younger investors may have a larger appetite for risk than their elders who must be more patient and cautious in their choices. The theory of buying and holding for the long term may require augmentation with active management when market returns are lackluster. Diversification with sector ETFs and timely allocation changes may be the best recipe for the future.
Markets will tend to be more volatile, with peaks and valleys, much as we have witnessed over the past year. In this environment, a trader’s mentality and approach will produce higher yields. An excellent avenue for understanding a trader’s perspective is practicing on a free forex demo account offered by a reputable forex broker. Take a forex course and learn what being a forex trader is all about. The free demo account will allow you to familiarize yourself with technical indicators and how active management can deal with a sideways market trend and risk. Should you chose to trade on a live account than keep in mind that Forex trading is risky and not suitable for all investors.
The benefit of technical analysis is that it is flexible across a multitude of investment vehicles and timeframes. What is learned in the forex market can be carried over to stocks as well. These principles will allow you to enter the market effectively and sell when most appropriate. Forex training will also emphasize risk management and how to mitigate risks in any market.
Active management will then help you obtain returns necessary for compounding when markets tend to move in a sideways fashion. IRAs are also available to shelter income from taxes on short-term trading gains. Reserve a trading approach for only a portion of your investment portfolio and never risk money that you cannot afford to lose. For the balance, major blue-chip stocks that pay good dividends have a good outlook for the future. Dividend reinvestment programs (DRIPs) offer long-term capital gains, and most studies have shown that over 90% of your profit will come from dividends, not stock appreciation.
Investing for retirement is not as easy as it once was. Savings must still be set aside on a recurring basis, and then invested when most prudent. An active management style will assist in this exercise, but stable companies with proven dividend histories can also offer long-term wealth accumulation opportunities.
This is a guest post by Jennifer Gorton from Forex Traders
