How Should You Invest in 2012?

It’s hard to imagine that the financial crisis happened over three years ago.  The ups and downs of the market over these past few years have been anything but stable.  Just three years ago, you were probably looking at your retirement funds wondering where half of it went.  Trust me, I know how discouraging it was to see a big negative 40% in my retirement account, but I kept investing and I’m sure glad I did.

These last few years were actually a great opportunity for younger investors like myself to buy up shares at bargain prices.  While it’s impossible to say with any certainty that the market won’t repeat itself, I’m confident that my long term strategy of buying in at all prices consistently each month, (dollar cost averaging) should build up a solid balance for my retirement years.

So the question still stands – how should you invest in 2012?  For me the answer is simple.  My investing strategy won’t change one bit.  But it doesn’t mean that I’ll be ignoring the market altogether.  It’s important to have an understanding of how the stock market works and how your funds are performing, so I try to stay informed on those issues.  But the key is to not let the short-term news affect your long-term goals and investing strategy.

My 2012 Investing Strategy

• Increase my retirement savings at work.

The majority of my retirement savings exists because of the small contributions I’ve made to my retirement account at work.  I can remember starting out with $40 a paycheck and wondering if it would ever get past $1,000.  If I had kept my contributions at $40, it would have taken a while, which is why I’m glad that I increased my contributions annually.  Each year, I increased my savings by $40 or $50 a paycheck, which didn’t hurt my paycheck all that much.  If you’re fortunate to get a raise every few years, you’ll be doing yourself a huge favor by shifting some of it into your retirement plan.

• Invest after-tax dollars automatically.

I love to talk about saving for retirement and the tax advantages of Roth IRAs and 401(k)s, but I’d be missing a crucial part of my investing strategy.  Investing after-tax savings in a brokerage account is my second investing strategy for 2012.  It almost acts as an emergency fund that works much harder than a typical CD or savings account.

I invest my after-tax savings in index funds through Betterment.  (Read my Betterment review here)  If you’re not familiar with index funds, think of it as a family of well-diversified stocks (like a mutual fund) that performs on par with the market.

I know what you’re probably thinking: Don’t I want to beat the market?  Why shoot for returns that are on par with the market.  I hear what you’re saying, but I’m a believer that the average investor will have a very difficult time beating out the market in the long run.  Index funds have historically performed better than actively managed funds (see this article from the Motley Fool) so it’s not worth the effort for me to try and beat the market.

• Set aside ‘play’ money to invest.

I know I just said that I’m a long-term, index fund believing investor, but remember how I said that I didn’t want to ignore the market completely in 2012?  That’s because I enjoy following a few companies and investing in their individual stocks.  For that I use a brokerage account (like Scottrade or eTrade) and only fill it with what I’m comfortable risking.  Understand, I’m not investing in extremely risky startups.  I use this ‘play’ money to satisfy my interest in following a few companies closely.  Besides, it keeps me from wanting to make unwise shifts in my main retirement and investment accounts, so I don’t see any harm in it.

Do you have any investment strategies that you’ll be following in 2012?

Tim is a personal finance writer at Faith and Finance a Christian financial help blog that provides financial insights for individuals, businesses, and churches. Outside of finance, Tim enjoys spending time with his wife, playing the saxophone, reading economics books, and a good game of RISK or Catan. Find him on Twitter and Facebook and subscribe to the Faith and Finance RSS feed.