Investing involves goals. When you decide to put your money into an investment, you should establish, and possibly write down, what you want to accomplish. Are you hoping to build up a down payment on a home? Fund college? Retire? Focusing on your goals will help you determine how to invest.
If you’re young with many years until retirement, you can choose riskier investments. This is because you have time to recover if the market drops and the value of your investment declines. Conversely, if you’ll be retiring soon you want to protect what you’ve built. You may not have time for the market to recover before you need to start drawing some of your investment as retirement income. For that reason many investment advisors will suggest moving to investments with low risk, such as high-grade bonds.
This brings me to one of the biggest concepts to grasp if you invest in the stock market: if the market drops, you have not lost money. What you have lost is value, but that value can be recovered if you allow the market to adjust. It may take time, but understand that the long-term trend of the stock market has been growth. You lose money if you sell your stocks when its value has dropped. If you’re invested in quality stocks, the key is patience. Breathe. Don’t panic. Give the market time to recover. Seek guidance from an experienced, trusted investment advisor.
We’ve all heard the basic premise of stock market investing: buy low, sell high. It may surprise you to know that most people do exactly the opposite. They buy the hot stock everyone else has been talking about. Unfortunately they are usually buying as that stock is nearing a peak in price. When the stock drops off that peak, those same people will panic and sell, losing money.
If a company is strong, the time to buy its stock may be after it has had some decline in price. An investor friend of mine once observed that the funny thing about stock is no one wants to buy it when it’s on sale. A strong company experiencing a temporarily low price in its stock may be “on sale.” Do your research and/or discuss the stock with your investment advisor, but if the company stock is “on sale,” this may be the time to buy.
We’ll get more into researching stock in coming posts, but for now I wanted to voice one of my concerns about some of the investment peddlers I see advertising on TV and online. They tell their followers to buy this or that “hot investment” right now. Yes, there may be gains, but mostly for the advertiser. He buys the investment, then tells his readers to buy it, thereby pushing up the price in a classic supply and demand scenario. The advertiser then sells his investment at its height before advising his readers to do the same. Always exercise professional skepticism when listening to these ads.
Real research comes from analyzing stock yourself, and perhaps reading reputable investment publications. There is a lot of quality information to be gleaned. The challenge is everyone else is reading the same information and potentially taking the same investment action you’re taking. That great, undervalued stock at a good bargain touted by the publication is being purchased by a number of readers, pushing its price up.
Don’t have time to research? Mutual funds may be the answer for you. Fund advisors have already done the research and put together a mix of stocks that, as a group, can be categorized as anything from low risk to very high risk. This allows you to choose a group of stocks based on your risk tolerance and have a diversified portfolio on a small budget. It is often the easiest way to venture into the market and test it out.
Have any thoughts or comments? I’d love to hear them. Have thoughts on future subjects? Please let me know. This is all about creating a dialogue from which we can all benefit.
To your better wealth,
