Effective Investment Strategies
Take a quick look at a few strategies that have been found to be successful in reaching most long-term investment goals.
Reinvestment of Dividends
Many, but not all, companies allow you to automatically purchase additional shares of stock with the dividends that are paid out to shareholders each year. Dividends paid by the securities a mutual fund holds are also distributed to the fund’s shareholders. The dividends of any security within a mutual fund are usually reinvested automatically into the fund unless you request otherwise. This allows you to buy more shares in that fund without incurring a sales charge.
Diversification means that you purchase a variety of investments. Diversification reduces risk because your assets are not dependent on the performance of any one security (e.g., stock). The ability to diversify your investments easily and affordably is one of the major benefits of mutual fund investing. By purchasing shares in a mutual fund, your investment dollars are spread out over a number of securities.
That’s important and wise. Since you may have more than one financial goal, you might want to diversify even further by investing in more than one mutual fund. For the biggest impact, look for funds that use different investment styles.
It’s a question every investor faces how do I pursue growth opportunities while managing risk? The key is to strike a balance between potential gain and possible loss by diversifying among several investment categories such as stocks, bonds, and cash equivalents. This process is called “asset allocation.” A landmark study by leading investment analysts found that over 90 percent of a portfolio’s performance directly relates to its mix of investment categories.* Asset classes have different characteristics and may perform differently in different economic and market conditions. The goal of asset allocation is to help you meet your financial objectives by achieving the highest returns over time without taking more risk than you can accept.
Especially for long-term investment goals, time itself can matter more than timing. Systematic investing can be one of the best ways to ensure that you have the funds available to invest to meet your financial goals. It is an easy and effective way to accumulate assets. In essence, you are “paying yourself first.” Some mutual fund companies allow you to invest with low minimum amounts and systematic electronic fund transfers from your checking or savings account.
Dollar Cost Averaging
When you use systematic investing, you obtain the benefits of another strategy: dollar cost averaging. This disciplined investment approach involves investing a specific amount of money on a regular basis. This way, you can purchase more shares when prices are low and fewer shares when prices are high. Overall, that means you will have paid a lower average price for each share you own. Over time, this strategy may markedly increase the value of your investments.
*Source: Brinson, Hood & Beehower, “Determinants of Portfolio Performance II,” Financial Analysts Journal, May-June 1991.