On the surface, it’s easy to believe that successful investing means buying and selling assets at perfect moments and capitalizing on the difference.
While there certainly are professionals making money like that, it’s not the type of investing that fits busy people who have the goal of growing their wealth over time.
So what do these people use to guide their buying and selling decisions? The answer is surprisingly simple.
The earlier you are invested in any asset, the more time you have for compound interest to work its magic.
When working on a long-term investing strategy – with a time horizon of decades and a well-diversified portfolio – the most important function for returns is gradual rises in prices mixed with compound interest. Hence, the daily rise or fall in asset values Is of little importance.
This long-term thinking creates a logical guide for buying and selling stocks, bonds, and other assets.
The when should almost always default to “as soon as possible”. The earlier you are invested in any asset, the more time you have for compound interest to work its magic. So, as long as you have an adequate iron reserve and allocation of cash to cover your living expenses, directing extra income to investments on a regular basis makes sense.
Whether or not you should be buying stocks, bonds, or other assets depends on the existing diversification in your portfolio. It’s logical to ensure your wealth is spread across a complementary set of asset types that will likely respond very differently to market events. For example, if you already own local real estate, a stock that’s located in a different country is unlikely to drop in value due to the same event that impacts that property.
Figuring out when to sell your assets is best achieved by consulting your strategy. In most cases, there will only be three triggers:
- You’ve reached the deadline date you originally set to cash out and make use of your returns
- Changing market conditions – a recession may be likely and there are not enough years between now and your intended exit date for your assets to recover and continue growing
- Changing life conditions – perhaps you’ve had a business idea that needs capital, you’ve got a third child on the way, or it’s time to pay for one of your children’s educations
The next step is using this information to build an investment strategy of your own. Follow us over to this article and we’ll dive into it.
