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If you have a brokerage account, you’ll want to follow a few rules to make sure you build wealth. Here are three rules to help keep your account on track.
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Opening a brokerage account can help you build wealth. This is true whether you open an individual retirement account (IRA) with an online broker to save for retirement, or you open a taxable brokerage account to save for other goals.
When you open a brokerage account with a discount online broker, you can start getting your money into the stock market without paying any commission fees. You should be able to earn better returns than you could even with the best high-yield savings account, as long as you make smart investment choices.
But you also face a potential risk of loss when you begin investing. You’ll want to minimize that risk and maximize the chances your investments will perform well by following three simple rules.
1. Maintain the right asset allocation
One of the first things you’ll need to do is decide on an asset allocation that makes sense for you. This refers to how you divide up your money into different assets. You don’t want to have too much exposure to high-risk investments or you could risk outsized losses. You also don’t want to invest too much in safe investments that present a limited risk but that come with limited returns.
One good rule of thumb is to subtract your age from 110 and put that percent of your money into the stock market while putting the rest in a safer investment such as government bonds. For example, a 30-year-old would want 80% of their invested money in the stock market (110 – 30 = 80).
You also want to be sure you don’t put all of your money into one company or even one industry or type of investment. For example, ideally, you’ll have an ownership stake in a good mix of small, mid-sized, and large companies across different industries in your portfolio.
Since this can get confusing, you can also opt to invest in index funds that track the performance of the stock market as a whole, or of the S&P 500, which is an index made up of 500 of the largest U.S. companies. If you buy these types of assets, you get instant diversification.
If you don’t want to do this, make sure you do the necessary research to come up with a plan for how to divide up your investment dollars in a safe way.
2. Buy and hold for the long term
There are different approaches to investing. One option is to try to buy assets that are temporarily down and resell them right away for a quick profit. This is not a good option. It’s called day trading, and the vast majority of people who do it fail.
The better option is to buy assets and hold them for the long term. If you buy index funds or even stock shares in trusted companies with a solid reputation for success, it’s likely that over time you will make money. This means you may lose in some years, but gain in others.
Buying and holding means you don’t have to time things perfectly. Even if you have poor timing, over many years, your investment account balance will grow. Ideally, you should hold onto your investments for a very long time. Famed investor Warren Buffett said his favorite holding period is “forever,” but if you aren’t willing to commit for that long, you still shouldn’t buy any assets you don’t want to remain invested in for a minimum of around five years.
3. Minimize your investment fees
Finally, you want to aim to minimize your investment fees as paying fees dramatically reduces your effective returns. You need to invest much more, and make a lot more money, to be a profitable investor if you’re paying costly fees to someone to buy, sell, or manage your assets.
Fortunately, there are plenty of discount brokers that don’t charge you a fee to trade and plenty of low-cost ETFs with very minimal expenses. Be sure you find the right broker and that you research the cost of any investment you’re considering.
If you can follow these three rules, hopefully your brokerage account will perform well. It’s worth the effort, as investing done right is a great wealth-building tool.
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