The smart investor's toolkit: 7 tips from personal finance professionals for building wealth through investing

• Kevin Matthews, founder of Building Bread, and Kelly Lannan, vice president of Fidelity Investment's Young Investors for Personal Investing, joined Business Insider's Tanza Loudenback to discuss investing for the Master your Money Live Digital Bootcamp.
• The experts shared tips for developing an investment strategy, balancing risk within a portfolio, navigating market downturns, and more.
• We've turned their insights and advice into a toolkit of best practices for investors who want to build wealth wisely.
• You can watch the entire video from the event here.

Thanks to the democratization of investing, largely through new technology, you don't need to be flush with cash to be an investor today. Some of the best investment apps allow you to get started investing in mutual funds or fractional shares with $10 or less.

No amount is too small to invest when time is on your side, said Kelly Lannan, vice president of Fidelity Investment's Young Investors for Personal Investing, during the Master your Money Live Digital Bootcamp: How to Be a Smarter Investor.

Still, she urges people to make sure they have their financial house in order before putting money into long-term investments: Establish an emergency fund, pay off high-interest debt, and ensure you're contributing to workplace retirement plans that offer a match.

During the Live Digital Bootcamp, Lannan and Kevin Matthews, a former financial advisor and the founder of Building Bread, shared tips for developing an investment strategy, balancing risk within a portfolio, navigating market downturns, and more.

Below, we've turned their insights and advice into a toolkit for smart investors.

Create an investment philosophy

Investing isn't something you should do on a whim, the experts said. Everyone needs an objective for investing — the why that informs your strategy and keeps you motivated to continue saving.

This is often called an investment philosophy, and Matthews believes most investors should have one.

"It helps you to evaluate whatever it is you're investing in on an easy, consistent rubric," he said. "If you don't have one, you just invest in stuff that you see, stuff that you hear about, or whatever you think is the best thing at that point in time. It can make you very inconsistent. You're going to get very inconsistent results," Matthews said.

Lannan encouraged young investors to think about investing as a tool, and build their philosophy around how it can help them accomplish their goals.

"When I'm thinking of investing, I'm thinking about the house I want in 10 years, I'm thinking about not working until I'm 120 years old. I'm thinking about one day, maybe having a kid and putting them in college without them having all this debt," Lannan said.

"That really grounds me in my investing philosophy — I think about it as a good way to help me reach some of those longer-term things that would just make me happy and help me live the life I want," she said.

Choose your investments based on your goals

With clearly defined goals, your time horizon — how much time you have to invest until you need the money to fund each of those goals — should come into focus. That will help you determine how much you risk you can afford to take to meet those timelines.

These factors, along with your risk tolerance, should direct you to specific investments, Matthews said.

"It's about getting to your financial destination in the safest way possible," he said. Most portfolios are invested in some combination of stocks and bonds because the two asset classes balance each other out. Because stocks tend to provide a higher average return than bonds, successful investors usually have a larger share of their portfolio invested in stocks when they're further from a goal, such as retirement. As they approach the goal, periodic rebalancing is usually necessary to dial back risk.

Matthews likens the stock-bond mix to riding a bike. "The way I like to describe it is stocks are like pedals. Those are going to push you forward. That's going to be the fun part of riding a bike," he said.

"Then bonds are going to be the brakes. That's going to slow you down when needed. It's going to make things less bumpy, like right now, to help you on that journey. But the older you get, the less pedals you need and the more brakes you need," Matthews said.

Reduce risk through diversification

There's always going to be risk if you're investing in a financial market. But through diversification and asset allocation — two of the most important investing terms to understand, Lannan said — you can control how much risk you take on.

"Really what these both mean is: Don't put all your eggs in one basket, because if you drop that basket, the eggs break and you can't eat breakfast," Lannan said. "Diversification and asset allocation are tremendous ways to protect yourself from risk. This means never being in a single industry or never just being in stocks."

Investing across and within different asset classes helps you control the levers of risk in your portfolio. Stocks (also known as equities) and bonds are the most common asset classes, but there's also cash (the least risky option), real estate, futures, and commodities.

Spreading your money across one or more of these assets and within them — buying stock from companies in different industries, for example — will balance out your overall risk.

Understand the difference between mutual funds and stocks

Investing in a mutual fund, rather than a single stock, is a good way to become instantly diversified.

As Matthews put it, "investing in one single stock is like owning a single team. ... But a mutual fund or an index fund can own the entire league. I don't have to pick the best teams. I don't have to worry about if a player or a team gets injured. I own the entire thing."

A mutual fund, he continued can own all one type of stock — technology stocks or oil stocks, for example — or both of those, plus more.

That means the pressure is off you to pick the best-performing stock, Matthews said, and there's some safety in that.

"It is possible, not probable, to beat the market," Matthews said. "Yes you can, in theory, but that doesn't mean that it is easy to do or that the vast majority of people actually do that."

Roll over a 401(k) retirement account

Many employers offer retirement plans for their employees that are portable when they leave the company, like a 401(k). It might be tempting to cash out your balance when you change jobs, but there will be a big tax bill waiting on the other side.

To allow your balance to continue growing and avoid early withdrawal penalties, it's often best to roll over a workplace plan into an IRA where you can keep contributing and control the investments, Matthews said.

An IRA is a retirement account that isn't managed by your employer. You can open one at almost any brokerage with a rollover from a workplace plan or fund it with a regular contribution.

Whether you pick a traditional IRA or a Roth IRA will depend on your investment strategy, income, and tax situation. A Roth IRA has income limits and is funded with after-tax dollars — meaning your balance grows tax-free and you can withdraw the money tax-free at age 59-and-a-half. A traditional IRA is also funded with post-tax dollars, but you may be able to get a tax deduction for your contributions, which means you'll have to pay taxes when the money is withdrawn later.

In most cases, Matthews said, it's smart to consolidate multiple old retirement accounts into one IRA to stay organized.

Above all, make sure you know how your money is being invested. Matthews said he worked with a client who realized her retirement contributions over two decades were sitting in her account in cash, not earning a return.

"That is almost like putting food into the microwave, or putting food into the oven, and not actually turning it on," Matthews said. "You can put money into it, but you want to make sure that it is invested in the funds that fit for you to actually grow the money."

Manage market downturns

This year has been no stranger to market volatility. But as unprecedented as 2020 feels, the ups and downs of the stock market aren't unique.

"One of the big things you want to know is to take comfort in the context," Matthews said. Between 2010 and 2020, the stock market was up for nearly a decade, he said. When the market plunged in March due to coronavirus concerns, it only took 30 to 45 days to begin its recovery, Matthews said.

"You don't want to focus on the 30 to 45 worst days we have seen in 10 years and let it make you forget about the good times that we had for 10 straight years. You want to have that context and know that long-term investors almost always win," he said. If your goals haven't changed, your investments probably don't need to either, Matthews said.

Lannan said most investors (excluding those within a few years of retirement) have plenty of time to make up for the losses, and can even use downturns to their advantage by reevaluating their diversification strategy or rebalancing their portfolio to match their risk tolerance. The key, she said, is not to panic.

Find a financial advisor you trust

Not everyone needs a financial advisor right now, but there comes a time when turning to a trusted expert can help.

"I definitely think it does make sense when your situation becomes a lot more complicated," Matthews said, whether that's marriage, divorce, kids, buying a house, or managing a big debt load.

Lannan said most workplace retirement plans offer an advisor to participants who want help with their investment strategy, but there are also resources online where you can get educated on the fundamentals of investing for free.

But Matthews said there's a big advantage to meeting with a financial advisor, either virtually or in person, who can weigh in on your particular financial situation: They've seen variations of it dozens of times. In other words, they're experienced where you may not be.

"Go with someone that you trust, go with someone that asks you a lot of questions," Matthews said. "You don't want to [go] to a financial advisor and they just talk at you." Expect them to ask questions, he continued, because people's financial situations aren't "cookie-cutter," and they need to understand your individual goals.