Investing in the stock market can seem intimidating. It conjures up images of professionals with fancy business degrees wearing expensive suits as they trade on the floor of the New York Stock Exchange.
The truth is you don’t have to be a stock analyst to successfully invest in the stock market. If you’re an investment beginner, you just need to follow these 3 principles: define your investment goals, diversify and keep your emotions in check. Let explore these further:
Define Your Investment Goals
Before you invest your money, you need to clarify what your goal is for the funds you are investing. Ask yourself the following questions:
- What will this money be used for in the future?
- How much will I ultimately need?
- When will I need to access the funds I have invested?
Keep in mind that most investment professionals don’t recommend investing money that you will need within the next 2 years. The closer you are to needing access to your money, the more conservative you want to be with your investments.
Next, you’ll need to determine the type of investment account you want to open based on your goals. Here are some examples:
- Retirement Accounts: These accounts are meant to help you save for the future. You can’t usually access the funds you’ve saved until you’re age 59 ½ (yes, you have to count the half) unless you pay a tax penalty. You should start by finding out if you have access to a retirement plan through work such as a 401k. If you don’t, consider opening an IRA (Individual Retirement Account) or Roth IRA. If you own a business, you may have additional options such as a Simple IRA or SEP IRA. An accountant or financial planner can help you figure out which option makes sense for you.
- Brokerage Accounts (Non-Retirement Accounts): With a brokerage account you can access your money when you want, but you’ll need to be aware of taxes. While money you contribute to a retirement account is invested and grows tax free, every transaction in a brokerage account can have tax implications.
You can open a retirement or brokerage account by contacting a brokerage firm. Some well-known brokerage firms with online capabilities include Fidelity, Charles Schwab, T.D. Ameritrade and Scottrade. Most of these firms offer accounts with a low or zero minimum opening balance. The list of brokerage firms is long so you’ll want to do your research, and choose a company that makes you feel comfortable.
Diversify Your Investments
Once you’ve opened an investment account and deposited funds, the next step is picking your investments. Financial professionals spend a lot of time talking to their clients about diversity.
The stock market is unpredictable. It doesn’t matter what level of financial knowledge or experience you have. No one has a crystal ball to know exactly how a particular stock is going to preform. That’s why it is so important to own the stocks of several different companies across several different industries.
One way to diversify is to buy a mutual fund or exchange traded fund (ETF) that can give you access to hundreds of different stocks with one purchase. A mutual fund has a professional manager who pools money from investors to buy a collection of stocks and bonds. ETFs are also made up of a collection of stocks, but they tend to track a major index such as the S&P 500. Because they mirror an index, there isn’t a need for a professional manager to select each investment within the fund so the fees tend to be lower.
Of course, you also have to select from the thousands of available mutual funds and ETFs. You may want to consider hiring an hourly financial planner who can help you build an investment strategy. Given that they are paid with a flat or hourly fee, you can be assured their advice isn’t geared towards earning a commission. Garrett Planning Network is a good resource for finding an hourly advisor.
Keep Your Emotions in Check
When the stock market dropped in 2008 due to the housing crisis many investors reacted by pulling their money out of the market. It was a big mistake. Yes, the market dropped drastically and quickly. In fact, it hadn’t performed so badly since the Great Depression. Yet within a few years the market had recovered and even hit new highs. Many of those who sold their investments in a state of panic missed out on the recovery, and a chance to recoup their losses.
Investing will always involve a certain amount of risk. You can minimize some investment risk (but never eliminate it) by following the first 2 principles of investing that we mentioned above.
Know your investment goals also means that as you are getting closer to needing your money, your investments are becoming more and more conservative so that you are protected from a market drop. Diversifying your investments means that you haven’t placed all your eggs in one basket.
Money is emotional. Some investors treat the stock market like a Vegas casino and take huge risks that more often than not turn out bad. Other investors are so afraid of risk that they pull their money out at the first sign of a downturn.
Markets move up and down. This means that there are bound to be a few bumps in the road, but the important thing is to build an investment strategy that matches your goals, is diversified and makes you feel comfortable. Even if you are an investment beginner, following these rules will put you well on your way to building a successful financial future!