The mention of the Stock Market reveals a negative feeling towards many people: Fear. They think of risks, losses and usually compare it to a black box or Pandora box. Why?
Two things come to mind.
1. The mystery: People look at a stock panel and they can’t figure it out. All the graphics, ups and downs, numbers changing fast on a screen. They don’t understand what to do or why some many changes and wild gyrations of the stocks. Many times, some answers about a stock drop comes after the fact, which frustrates many new investors in the stock market. They don’t know when to buy/sell, so the results in a short term make them quit.
2. Using an expert: since people don’t understand the rules of the game, they hire a broker. In their minds, he’s the specialist, the person who will tell me when/what/why to invest in some stock. However, if a certain stock considered good by the broker goes down once, people assume the broker or administrator is doing a poor job and that their broker doesn’t really know what they are doing.
Then, how to navigate through the Stock Market?
It’s a gamble. Investing is a sort of gambling and no one can predict a gambling result. The stock market, however, does have some consistency. The overall market does keep going up. That means that the Dow Jones and the NASDAQ keep going up. Each individual stock, however, is totally different.
Individual stocks: A single stock will fluctuate through time. Ups and downs are unpredictable at some point. Research is a good tool to understand the potential of a stock. However, it doesn’t guarantee the win.
Acquiring your portfolio: it is a good idea to buy into mutual funds and ETFs. They are made up of a variety of stocks and other items. It isn’t likely that all of the stocks and items in the fund will go down and stay down. By having a basket of items, it is a safer way to keep stability in the long term.
Portfolio Diversity: The more diverse any portfolio is, the more likely it is to succeed going up nice and slowly overall. In other words, don’t just buy one kind of stock or mutual fund or ETF. Buy a bit of material from a few categories. There are many of them such as financial institutes, high technology, health care, industrials, telecommunications, utilities, consumer goods, mining, and energy to name some of the major ones. By buying into just one or two categories that may falter will, any portfolio made up like this will be prone to poorer results.
Time matters: don’t panic if your portfolio or stock goes down once. The variables in the market are plenty to create different options through time. Investing is a long-term activity. Just because one stock went down, it doesn’t mean you have to sell it right away. In the period of a year, your portfolio may go up and down many times.
Something to be aware
Getting Rich Fast: it won’t happen. The stock market is well known for going up over the years. Not every year but over the years. In general, stocks have gone up very decently over the last century, with only a few blips like the great depression or 2007-2008. But in every case, they have come back either slowly or quite quickly.
Of course, people do get very excited when the market has meltdowns. What should they do?
The standard theory is to just keep to the course so long as you’re financially safe and have lots of time to recoup once the market resumes its usual upward trend.
The results of investing in stocks take around 3-5 years to generate a significant amount.
Nearly Retirement: if you’re close to retiring, keep this in mind: you do really need to worry about bearish (downward) markets. In these cases, it is important to start changing your portfolio to safer stocks, mutual funds or ETFs. In fact, there are even mutual funds and ETFs that are designed to not only be safe but provide a steady income.
In a Nutshell:
The stock market is the best way to save overall and it is a scary place to put your money in. Therefore it is best to use start with Mutual Funds and ETFs and spread funds over a range of categories. Buy stocks only once you have learned how they work. They are much scarier than mutual funds and ETFs. That way, the undulations will be more tempered over the long run. But, always try to learn a bit about the market in order to understand what is going on. Educate yourself, analyze the risks. It will make it easier to sleep at night if you understand what is happening.