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.
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.
4. Keep costs down. It’s hard to gauge ahead of time what your investments will earn. But investment costs are something you know in advance and can control. For starters, you can save money on brokerage commissions by using an online discount broker, such as Fidelity, E-Trade (ETFC), Schwab (SCHW) or TD Ameritrade (AMTD). If you’re okay with just earning a market’s return, buy index mutual funds from firms such as Vanguard and Fidelity; many of their index funds charge just 0.1 percent or so a year. If you prefer active management, give extra credit to funds with below-average fees. The Kiplinger 25, the list of our favorite mutual funds, is a good place to start.