- Get Started Early
- Choose the Right Funds
- Determine Investment Amount
- Create the Right Portfolio
- Stay on Schedule
It's never too early to start planning for the future. Visualize your retirement. Create a budget for your children's college expenses. Imagine your next big excursion. Once you have the goal, you can begin to take steps to bring it to fruition.
When time is on your side, your investment has time to work for you. And if your money grows, you're investing more. How does this work? It's the power of compounding.
Thanks to the benefits of compounding, the sooner you start saving for your future, the easier it will be to reach your goals. Compounding makes the money you save today more powerful than the money you save tomorrow.
Dreams have great power. Some dreams have been around as long as we have—a new house, travel on a whim, our child's education, the fairy-tale wedding, or retirement on the water. Whatever our dreams, we have the power to use them as a motivating force. Translate your dreams into specific goals. Chart a course to reach them. Choosing the right funds is an important part of this process.
First, identify your investment goals. Retirement and education are two common goals, but consider short-term goals as well, like a vacation or a new car.
Next, determine your asset allocation. Asset allocation is the process of deciding how your portfolio will be spread across different kinds of investments (such as stocks, bonds, and mutual funds). Once you know your budget (how much money you will need) and your time line (when you will need it), you can use that information to help select funds.
With short-term goals, you may consider a conservative approach. Work to protect your principal (your original contribution to the account). With long-term goals, you may decide to take advantage of the time horizon. Depending on your personal tolerance for risk, you can consider more aggressive investments, which offer greater return potential. Once you've selected your funds, be sure to review your accounts and analyze your portfolio on a regular basis. Investments with greater return potential also have greater risks.
How much should you contribute to your investment accounts? Once you identify your goals, consider the following questions:
- How much money do you need to meet your goal?
- How much time will you have to save for your goal?
- How will this savings goal fit within your current budget?
Most of us think of money in terms of a monthly budget. So how much would you need to save each month? How about weekly? Make it personal. Take a look at your spending, your household budget, and your income. Determine what you'll need to do to make your goal a reality.
Imagine that you're an executive building a top-tier team for your organization. It's up to you to choose the right people for the right positions. Each team member has a unique set of skills and strengths, but it's the power of the group that makes your company successful.
Your portfolio is your "team" of investments. How do you choose your team members? Take a close look at your personal goals, your time horizon for investing, and your tolerance for risk. At T. Rowe Price, we can provide information and education so you can create a portfolio that fits your particular needs. Creating a portfolio begins with asset allocation.
Asset allocation is the process of deciding how your money will be invested. Most investors focus on stocks, bonds, or short-term investments.
Achieving the asset allocation that's right for you depends mainly on your time horizon, which includes both the time you have until you begin using the assets (your investment horizon) and the number of years that you will need to draw upon your investments (your drawdown period). If you won't need the money for many years or will be withdrawing your investments over an extended period, you have time to ride out short-term market fluctuations. In this case, you may be able to afford to take on higher volatility and decide to include more stocks than someone saving for a short-term goal.
The Asset Allocation Planning page can help you determine an appropriate allocation depending on your goals and time horizon.
It takes a firm foundation to weather the storms of a volatile market. For beginning investors, making consistent contributions on a regular schedule is the key to building that foundation. The habit of making consistent contributions is just as important as choosing the right investments.
The first reason to put investments on a schedule? Dollar cost averaging.1 With dollar cost averaging, you contribute a set dollar amount to your investment account on a particular schedule (usually monthly or quarterly). Regardless of market conditions, you contribute the same amount. This means that your contribution purchases more shares of a stock or mutual fund when the share price is low and fewer shares when the share price is high. The idea is that, over time, your commitment to an investing schedule will allow you to enjoy the benefits of long-term investing, regardless of market volatility.
An easy way to commit to a regular investment plan is to use our Automatic Asset Builder (AAB) service. Just designate which of your T. Rowe Price accounts you want set up with AAB, and the monthly contribution will be funded from your bank account, paycheck, or Social Security check.
Since you're investing every month, you can benefit from compounding and dollar cost averaging. Making regular contributions lets you add to your account consistently and provides the opportunity to build significant savings. The chart below shows how.
Assumes a $0 opening balance and monthly contributions compounded annually at a hypothetical 7% rate of return net of fees. This chart is for illustrative purposes only and does not represent the performance of any specific security.
Placing your contributions on a regular schedule is a great way to stay committed to your overall financial goals.
1Dollar cost averaging cannot assure a profit or protect against loss in a declining market. Since a plan such as dollar cost averaging involves continuous investment in securities regardless of fluctuating price levels, investors should consider their financial ability to continue purchases through periods of low price levels.