Is fear holding you back from investing in the stock market?
Avoiding the stock market because it seems volatile and risky could seriously impact your earning potential in the long run. Investing in the stock market is one of the best ways to grow your wealth long term and in today’s’ post I’m going to share with you a few tips to help overcome your fears and get started with the stock market.
Have a Stock Market Plan
Life is better with a plan. This includes your approach to investing too. Arming yourself with a strategy before getting started in the stock market will help minimise fear and uncertainty. With a road map, you’ll have a good idea of where you are now and where you want to get to.
A few points to consider when coming up with your investing plan:
What is the purpose for your investing? Set specific and realistic goals. For stock market investments, focus on long-range goals but create a series of checkpoints to reach along the way. These will help evaluate and guide your progress.
How much risk are you comfortable taking on? Your time horizon plays a key role in determining your risk level. Generally, if you have a longer time horizon, you’ll have the capacity to take on higher levels of risk as you have more time to recover from any short-term losses.
Contributions: Realistically, how much can you afford to contribute to your portfolio and how often? You’ll need to look at your entire financial situation, analysing income vs expenses to identify sources of funds for your investment goals. Obviously, the more you can increase your income and minimise expenses, the more you’ll have to invest!
Decide on your asset mix: This is how you divide your money among various investments. The right mix will give you some control over the volatility of your portfolio which will help keep a cap on anxiety levels too.
While there are no guarantees in the world of investing, your plan provides a framework to track your progress against your goals make any adjustments along the way.
Avoid Watching The Stock Market Daily
Checking in on how your stocks are performing every day is a recipe for anxiety; it’s easy to get spooked if a stock price declines. This can lead to making financial decisions based on emotion which is never a good idea.
With so much access to real-time information, it’s hard not to look daily but if you’re playing the long game (and you should be) you really only need to be checking in monthly .
There’s a lot of noise that happens on a daily basis but caving into excessive, reactive trading can put you at a disadvantage when it comes to long-term wealth creation.
“One of my favorite rules is ‘Don’t peek.’ Don’t let all the noise drown out your common sense and your wisdom. Just try not to pay that much attention, because it will have no effect whatsoever, categorically, on your lifetime investment returns.” – Jack Bogle, legendary investor and founder of The Vanguard Group
It’s not about ‘picking’ the market
The idea that you need to be incredibly talented at picking individual stocks or pay a fund manager a lot of money to do it for you can make investing in the market feel intimidating.
There’s good news though. You don’t actually need to know the ins-and-outs of individual stocks if you opt for the easier way in; Exchange Traded Funds (EFTs)
EFTs are like stocks and traded on the stock exchange but rather than investing in an individual company, an ETF tracks an index – a group of companies – and allows you to invest in all of them.
Let’s use the Standard & Poor 500 Index (S&P 500) for example.
The S&P 500 is a diverse index of 500 American companies in different sectors including; energy, industrials, healthcare, financials, information technology and consumer products.
To invest in different shares of various companies in the S&P 500 you’d need to research, purchase, track, and sell the shares individually.
With an EFT, you’re buying shares in all companies across the index. You don’t need to know the minute details of each one. It’s also a way to diversify and not put all your eggs in one basket with a single stock.
An EFT mimics the performance of the index as a whole and provides investors with a benchmark return. They also don’t have the same costly fees to trade like a single stock.
In addition to the indices, you have the option for EFTs other asset classes including, bonds, commodities, real estate and currencies.
Invest for the long-term
Often swinging up or down hundreds of points in a day, the stock market certainly seems like a volatile option for short-term investments. However, with a long-term vision, it’s an excellent vehicle for wealth creation.
Looking at returns in a 20 or 30 year context, the short-term volatility of the market doesn’t seem as scary as there’s time to recover a loss… and there is the historical knowledge that the stock market has never failed to climb higher than the previous high after a correction.
Having some percentage of your investment portfolio in the stock market also helps hedge against inflation. Holding fixed income securities, or socking cash away under your mattress is not enough to keep pace with inflation and taxes.
Despite the ups and downs, stocks and ETFs offer the most growth potential compared to short-term investments.
I hope these points have helped you see the stock market doesn’t need to be a scary option for investing. In fact, it’s one of the best ways to secure your long-term financial future.
What are your feelings or hesitations about investing in stocks? Leave a comment below and let’s see if we can squash it now so you can move on to successful investing.