Investing can seem complicated, but understanding a few core principles can make all the difference. At Elevate Wealth, we believe that by mastering key investing concepts, you can make more informed financial decisions and build lasting wealth.
Risk and Return: The Core of Investing
One of the most important principles in investing is the relationship between risk and return. Historically, higher-risk investments have generated higher expected returns, while lower-risk investments have offered more stability but lower returns.
For example, stocks have outperformed short-term Treasury bonds over the long term. Why? One reason is that stocks are riskier—their prices fluctuate more, and they experience deeper drawdowns during market downturns. Investors require compensation for taking on that risk, which leads to higher long-term returns.
On the other hand, Treasury bonds are among the safest investments available, but their returns have been modest, just slightly outpacing inflation. The key takeaway? Higher risk tends to mean higher expected returns, while lower risk means lower returns. Finding the right balance is essential for achieving long-term financial goals while remaining within your overall risk tolerance.
The Time Value of Money: Why Investing Early Matters
Another fundamental concept in investing is the time value of money—the idea that a dollar today is worth more than a dollar in the future because of the risk of inflation.
Finance, at its core, is about moving money between the present and the future. When we choose to invest, we are forgoing consumption of today’s resources, locking them up for a period, and allowing returns to compound over time. Conversely, when we borrow money, we’re pulling future resources into the present.
This is why starting early is so powerful. The longer money stays invested, the greater the potential for compounding returns. Investors who consistently save and invest over decades put themselves in the best position to achieve financial security.
Efficient Markets
In an efficient market, stock prices reflect all available information almost immediately. If this is true, then trying to consistently “beat the market” through stock picking or technical analysis is a losing game.
While no market is perfectly efficient—anomalies do exist—highly liquid markets like U.S. stocks process new information quickly. Strategies based on trying to find “incorrect” prices or predicting the future are not likely to succeed consistently. Instead, trusting the market to set fair and reasonable prices, and focusing on a long-term, diversified investment plan is more likely to be the best approach.
Diversification Matters
Diversification has often been called the only “free lunch” in investing, and for good reason. It is the most effective tool we have to manage risk and create a more stable investment experience.
By holding a mix of assets that behave differently under various conditions, investors can reduce their exposure to any single investment’s ups and downs. A well-diversified portfolio smooths out returns and minimizes the risk of permanent capital loss.
A simple way to enhance diversification in a stock portfolio? Adding short-term, high-quality bonds, such as five-year Treasury bonds. Historically, these bonds have performed well during stock market downturns, helping stabilize portfolios when stocks experience volatility.
Patience: The Key to Long-Term Success
A question I often hear is: How do we know the stock market will continue to deliver strong returns in the future?
The honest answer is—we can’t know that for sure because the future is unpredictable. However, history provides strong evidence that publicly traded companies have been able to adapt, compete and innovate in a wide variety of economic and political climates. For well more than a century, long-term investors have been rewarded for their patience.
Markets go through cycles, with periods of growth and periods of decline. But over time, markets have always recovered and continued to grow. Investors who stay committed to their long-term strategy—rather than reacting emotionally to short-term volatility—are far more likely to achieve success.
Build a Plan That Works for You
Investing doesn’t have to be complicated, and you don’t need to predict the future to succeed. The key is having a solid plan and sticking with it. At Elevate Wealth, we specialize in helping clients develop investment strategies tailored to their financial goals. If you’d like help, visit elevate-wealth.com and click “Let’s Talk!” to schedule a consultation today.
Disclosure: The opinions expressed herein are those of Elevate Wealth Advisory (“EWA”) and are subject to change without notice. EWA reserves the right to modify its current investment strategies and techniques based on changing market dynamics or client needs. This should not be considered investment advice or an offer to sell any product. Past performance is no guarantee of future results. This contains forecasts, estimates, beliefs and/or similar information (“forward looking information”). Forward looking information is subject to inherent uncertainties and qualifications and is based on numerous assumptions, in each case whether or not identified herein. It is provided for informational purposes only and should not be considered a recommendation to buy or sell securities or a guarantee of future results. EWA is an independent investment adviser registered under the Investment Advisers Act of 1940, as amended. Registration does not imply a certain level of skill or training. More information about EWA, including our investment strategies, fees and objectives can be found in our ADV Part 2, which is available upon request.
