Did you know only 52% of Americans invest in the stock market? The reasons for this are varied, from fear after the market crash of 2007-2008, the current market unpredictability, to a lack of understanding/fear.[i] Since 1995 though, the S&P 500 has risen 7.8% a year on average. At that rate, someone starting with $1,000 and putting just $100 a month into a fund indexed to the S&P would after 35 years have $227,078 — enough to generate an added $17,000 a year of income in retirement.[ii]
Whether you are new to the market or have been investing and trading for years, most likely you’ve encountered some doubt or worry. This makes sense as the stock market is a volatile entity that rises and falls. The good news is that 100 years of investment history shows the stock market to be a consistently-good wealth creator.[iii] If you are investing for your retirement or to build up your savings, it is understandable to be a little nervous, but with a few steps, which we will outline below, you can feel more secure in your investments and security.
Tip One: Know When to Hold ‘Em and When to Fold ‘Em
As the old song goes, knowing what stocks to keep hold of and which to sell is a must for good investing strategy. The goal of most investing is to buy stock low and trade it when high. Also, important to remember that frequent buying and selling can actually cost more, versus holding onto an underperforming stock, in brokers fees and taxes. Have a risk profile and understand and weigh the risks versus the rewards of your investments. When times are rough in the market, it may be better to hunker down, hold onto your solid investments and wait out the storm. On the other side, it may make more sense to sell an underperforming stock. Having a diverse portfolio can also help both protect you so a few underperforming areas will not be as harmful to your overall investment.
Tip Two: Pick an Investing Strategy
“The most important quality for an investor is temperament, not intellect.”
At the core, there are two types of investing styles: going bolder or more conservative. Bolder comes with higher risks and potentially higher short-term rewards. Conservative can be safer but potentially (if assets are mostly in savings or low-growth areas) not as profitable. The shortest style, day trading, which is fast buying and selling to capitalize on short-term price changes comes with the highest risk. The buy and hold method, which is what it sounds like- where investors purchase stock with the intent of keeping it and watching it grow. Like all investing, all investing techniques come with their share of risk. Short term investing will often not generate the same returns as the long-term and the latter takes a long time and often involves patience. There are ways to manage the risks, no matter your investment style, by diversification and asset allocation. Essentially not putting all your investment eggs inside a single basket.
Tip Three: Play the Long Game
“If you aren’t thinking about owning a stock for ten years, don’t even think about owning it for ten minutes.”
Unpredictability in the stock market can make investors jumpy, jumpy investors tend to behave in a manner opposite their best interests. Approaching your investments like a crockpot versus a skillet may help you to be less anxious. A strong portfolio doesn’t need to be checked daily (unless you are doing day trading, obviously) and it may be better to ignore the daily, weekly, even monthly rises and falls, and look instead only at quarterly and yearly projections. You want to make sure your stocks are performing well, but on a macro level, not a micro level.
Tip Four: Do Your Homework
As mentioned above, being an educated investor is really key. Do not act impulsively with your investments, instead do your research before making any moves. Ignore hot tips, panicked rumors, and the like, and go do your own follow-ups before doing anything major. The stock market is not for the faint of heart, anytime the news lists a major plummet, it’s understandable to want to clean house. But always take a moment before acting, that moment can make a huge difference long-term. Find trusted, knowledgeable professionals to help with your portfolio, and be illuminate yourself on where your money is and how your stocks perform.
Tip Five: No Risk No Reward
Did you know that stocks have a historical return of 8-10% compared to 2-4% in real estate?[iv]
In fact, having a diverse, well-stocked investment portfolio may be one of the best protections against a financial crisis, health emergency, job loss, or any other unexpected scenario.[v] The goal is to grow your investments to fund your life and help pay for your retirement. Like anything worth doing, taking the time to educate yourself and surround yourself with good advice from sound sources, will only help you toward your goals.
“Games are won by players who focus on the playing field – not by those whose eyes are glued to the scoreboard.”