This timely piece by Steve looks at the ways investors can invest in the stock market without putting their financial future at risk. Tim
What a year it’s been so far for the stock market. Wild swings are keeping investors on edge, and some of the best-performing stocks of last year are down more than 40% so far this year.
Why? It’s a combination of things, including lower-than-expected earnings reports from major companies, inflation worries, and federal reserve interest rate hikes.
How can we keep the highly volatile stock market from driving us insane and bankrupting our future?
Here are 5 ways to manage your wealth in an unstable market.
1. Invest, don’t day trade.
The truth is most investors don’t get rich by day trading. Constantly buying and selling stocks on a daily (and hourly!) basis might sound exciting, but for most of us, day trading doesn’t make us rich.
Did you know that an estimated 95% of day traders lose money? Don’t be one of these people.
Instead, buying and holding a diversified set of stocks and bonds is how most working professionals build wealth over time. It might seem boring, but it works. Index funds, for instance, are extremely popular investment vehicles with a demonstrated track record of building wealth for lots and lots of people.
2. Think long-term.
It’s disheartening to watch our investment portfolio shrink. And, it seems like that’s all it’s been doing this year. But remember, true wealth is built over time, not overnight.
Long-term investors invest in index funds (or high-quality individual stocks) and hold for the long term. Think years. Sometimes, decades. While it’s true that some stocks will go down, history has clearly and consistently shown that most stocks will, over the long term, go up.
All investors need to do is hold onto those stocks long enough to realize the gains.
3. Diversification is key.
How do we know which stocks to invest in? What ones will go up? Which will go down? The short answer is simple: nobody really knows.
This unknown is why diversification is such an important concept in investing.
Think of it this way: If you invest in only two or three stocks, then your entire investment nest egg is tied up in only two or three stocks. In order to make money, you need at least one or two of those stocks to go up. Otherwise, you risk losing a great deal of money.
Contrast that with a diversified portfolio of hundreds of companies. Index funds make this process easy, and it means investors won’t lose their shirts even if the stocks of several companies that are inside the index fund tank. Investing in a wide variety of stocks more evenly distributes risk.
Real estate is also a good option. Real estate prices are still on the rise in most areas of the country, but that doesn’t mean you can’t find deals. If the market is getting you nervous, consider jumping into real estate investments, or REITs, to further diversify your portfolio outside of the stock market.
4. Dollar-cost averaging is better than timing the market.
There are two primary schools of thought for how often to invest. And, one of them is much riskier than the other.
First, timing the market (riskier). With this strategy, we only invest when we think stocks are at their lowest. Then, we hope that stocks go up from there. If we time it right, we stand to earn a lot of capital gains because we invested at just the right time.
The problem is very few of us know the right time. We might get lucky here and there, but it’s impossible to consistently time the market. Some investors try. Most fail.
The second school of thought is dollar-cost averaging. This strategy means we’re investing a set amount of money at a consistent interval (ie: monthly, biweekly, etc) regardless of the price of the stock. Automation makes this super easy, and many companies offer 401(k) and Roth IRA plans with automated contributions straight from your paycheck.
I am a big believer in dollar-cost averaging and built considerable wealth using this simple strategy that makes investing much easier. No need to pick and choose when to invest more money. Instead, you’re always investing.
5. Only invest within your limits.
Though I’m a huge proponent of investing, I also encourage investors to establish realistic limits on how much money they invest. Resist the temptation to overextend yourself by investing too much money because if the market does drop, or a recession hits the economy, you might feel the burden of having too much money invested in a down market.
My strategy: Decide on a set amount of money to invest every month. Use dollar-cost averaging to invest on a consistent schedule and stick to it.
Also, try to keep things in perspective. Last year, the S&P set record highs a whopping 68 different times, which was the greatest number of all-time highs for the index in more than two decades. In 2021, the S&P tracked the creation of $8.6 trillion in value.
And, this is the very nature of the stock market.
Sometimes the market is up. Other times, it’s down. However, history has clearly shown that investors that remain in the market over the long-haul stand to make the most money. No timing the market. No picking and choosing stocks. Just good old-fashioned buying and holding.
So far, 2022 has been a test. Are you passing?
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Tim Thomas has no positions in the stocks, ETFs or commodities mentioned.
This post originally appeared on Wealth of Geeks and has been syndicated by Tim Thomas / Timothy Thomas Limited.
Featured image credit: Pixabay.