#8Keep investing.

All too often, people start putting money away in a savings account but fail to think about how to start investing. To stay ahead of inflation, your money needs to earn more than many traditional savings accounts pay. What’s your best strategy? Our research indicates that the best action a long-term investor can take is to invest at the first possible moment—regardless of what the market’s doing.

Three important steps to smart investing

  1. Create a plan.
    • Have an investment plan that is realistic and actionable.
    • Understand your plan, follow it, and adjust it when things change in your life.
  2. Put your plan into action.
    • Keep your portfolio diversified with an asset allocation that’s right for your risk tolerance—and stick with it.
    • Don’t wait. If you invest now, you’ll start earning sooner.
  3. Stay on track.
    • Do periodic checkups to keep your portfolio healthy.
    • Keep in mind that long-term goals are more important than short-term performance.
Cost of waiting to investEnding wealth of four types of investors over all 20-year periods (1926-2014). Type A: perfect timing, $180,150. Type B: invest immediately, $167,422. Type C: bad timing, $146,743. Type D: stay in cash investments, $65,715.
Cost of waiting to investEnding wealth of four types of investors over all 20-year periods (1926-2014). Type A: perfect timing, $180,150. Type B: invest immediately, $167,422. Type C: bad timing, $146,743. Type D: stay in cash investments, $65,715.

Make it happen.

Have questions?

What’s the best way to invest my IRA savings?

First and foremost, make sure you’ve implemented an appropriate overall asset allocation with high-quality, low-cost investments across and within each asset class.

Once that’s done, you can potentially maximize gains on your investments by placing certain types of investments in certain accounts based on tax efficiency. Broadly speaking, investments that tend to lose less of their return to income taxes are good candidates for taxable accounts. Investments that lose more of their return to taxes would go in tax-advantaged accounts.

Where some tax-smart investors place their investments
Taxable accounts Tax-deferred accounts such as traditional IRAs and 401(k)s
Here you’d ideally place: Here you’d ideally place:
  • Tax-managed stock funds, index funds, exchange-traded funds (ETFs), low-turnover stock funds
  • Stocks or mutual funds that pay qualified dividends
  • Municipal bonds, I Bonds (savings bonds)
  • Actively managed funds that may generate significant short-term capital gains
  • Taxable bond funds, zero-coupon bonds, inflation-protected bonds, or high-yield bond funds
  • Real estate investment trusts (REITs)

The Roth IRA might be an exception to these general rules of thumb. Since qualified distributions do not require any additional taxes, investments you believe have the greatest potential for higher returns are best placed in a Roth IRA when possible.

Should I be in stocks? Bonds? Cash?

How you invest across stocks, bonds, and cash—your asset allocation—is one of the keys to long-term success. That’s because these three basic asset classes respond to the market differently. When one is up, another can be down.

For instance, stocks are the most volatile and respond more quickly to market movements. Bonds, on the other hand, can provide a more stable return. Investing in both can help smooth out volatility.

Choosing the allocation that’s right for you

How you allocate your assets should be based on three things:

  • Your goals—both short- and long-term
  • The number of years you have to invest
  • Your tolerance for risk

Basing your asset allocation on these three important factors will make it easier for you to stick to your plan over the long term—even during years when there’s a loss.

Here are some model asset allocation plans that offer different balances of risk and return.

Strategic asset allocation models

  • Conservative allocation modelConservative allocation model is composed of 15% large-cap equity, 0% small-cap equity, 5% international equity, 50% fixed income, and 30% cash equivalents.
  • Moderate allocation modelModerate allocation model is composed of 35% large-cap equity, 10% small-cap equity, 15% international equity, 35% fixed income, and 5% cash equivalents.
  • Aggressive allocation modelAggressive allocation model is composed of 50% large-cap equity, 20% small-cap equity, 25% international equity, 0% fixed income, and 5% cash equivalents.

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