Six keys to successful investing

By Dianne H. Webster

A successful investor maximizes gains and minimizes losses. Sounds simple, but how does one do it? Here are some basic practices to keep in mind in good markets and bad.

• Compounding. Compounding pays earnings on your reinvested earnings. It's the "snowball effect." The longer you keep your money working for you, with dividends and capital gains reinvested, the better. And more, if your investments are growing in a tax-deferred retirement account, you are paying no taxes on those earnings. Let time work in your favor, and worry less about figuring out when to jump in and out of the market.
• Stay invested for the long-term. The capital markets can be volatile, so remember to invest only what you can put aside for the long-term. Be prepared to ride out the inevitable downward cycles. Remember also that during any given period, the value of some assets will go down while others go up. Past performance does not predict future results, but keeping a variety of asset classes minimizes overall risk.
• Spread the wealth. Asset allocation means dispersing your money over several categories of assets, including stocks, bonds, cash, real estate, insurance and even collectibles. Even within each asset category, there are numerous sub-categories such as growth stocks, value stocks, international investments and government securities. It's smart to divide up your investment dollars between assets that respond differently to market forces.
• Maintain liquidity. In general, keep money in cash when you expect to need it in the short term (one to three years), such as to pay a tuition bill or to purchase a new car. "Cash" means a savings account, CD or money market. Your rate of return may be relatively low, but it is worth knowing that your money is quickly available without concern over market conditions.
• Dollar cost averaging. This is a method of accumulating shares by purchasing a fixed dollar amount at regularly scheduled intervals over a long period of time. When the price is high, your fixed dollar amount buys fewer shares, but when prices are low the same amount buys more shares. Remember that dollar cost averaging does not guarantee a profit or protect you against a loss, so you should consider your ability to keep investing when the market is down.
• Review your plan. Your long-term success will depend on regularly reviewing it. Consider changes in the economy, the market and your personal situation. Over time, your asset allocation will change and the portfolio will need to be rebalanced to stay on track with your plan. Rebalancing restores your portfolio to the original planned allocation. You might consider rebalancing every year or whenever you notice a major shift in the overall mix.

Dianne Webster is a registered investment adviser with Integrated Financial Strategies LLC of Amesbury.