1. Diversify. Stocks, bonds, cash, real estate and other investments provide varying rewards: Some protect against inflation, and others provide the growth or income you might need for specific goals. Plus, their prices move at different speeds and, sometimes, in opposite directions. Owning something in each investment category allows you to take reasonable risks without producing unreasonable volatility for your portfolio. Likewise, you should diversify within each category.
2. Rebalance. The normal (and sometimes abnormal) moves of any given investment category can derail your well-thought-out plans if you fail to rebalance regularly. Rebalancing requires nothing more complicated than reviewing your investments annually to make sure that the percentages you hold in each investment class (and sometimes in each specific investment) have not strayed wildly from your original goals. Then, you sell investments that have performed relatively well and use the proceeds to invest in relative laggards.
View all Courses 3. Dollar-cost average. Another simple and effective way to buy low is to put your investments on autopilot by subscribing to a dollar-cost-averaging plan. Dollar-cost averaging simply means that you invest the same amount of money in the same investments on a regular basis. If you're contributing to a 401(k) plan, you're already practicing dollar-cost averaging. If you receive a windfall, averaging keeps you from putting all of your money into an investment at an inopportune time and forces you to bravely keep buying even if the market tumbles.
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