Investors today have many options to choose from. They can go with bonds, treasury bills, real estate, commodities, and even venture capital options. But the stock market remains the most popular choice for investors trying to build their wealth for retirement.
There is a good reason for this. Many investors have done quite well in the stock market. That’s in spite of downturns, corrections, recessions, and stock market volatility, all of which should be inspiring investors to consider other options. Ironically, that success can backfire, because many people enter the stock market without really knowing how to handle it, and their decisions can impact you as a fellow investor.
In addition to the risk inherent in a well-managed portfolio, it is important to understand that it is often possible to handle your stock investments incorrectly, leading to poorer returns or even negative returns. It’s important to educate yourself about what you should do and shouldn’t do with stocks. Here’s a little start on basic strategies for investing in the stock market.
Throughout history, banks and the stock markets have experienced events sometimes known as “panics.” They lead depositors and investors to rapidly remove their money in hopes of cutting losses.
And although the very name tells you that this is often a mistake, these events happen anyway. Keeping a cool head when things get bad is essential, and the value of your stocks can be dragged down by those who make poor decisions during a temporary event. If that happens when you are approaching the time when you need to cash in your stocks, the impact can be dramatic.
Does it actually matter if the stock you bought at $29 suddenly drops to $7.50? Only if you sell it. Your portfolio will have an anemic look for a little while, but in time, that $7.50 could easily return to and surpass the $29. If you sell at $7.50, you make the loss official. If you hold on, the loss is only on paper. But as we’ve already noted, these events can take place close to your expected retirement time, meaning you may have no choice to sell at that lower price.
Keep It Diversified
A recession impacts every stock, but individual stocks can experience their own individual recessions. Over the years, countless companies have had the bottom fall out of their shares. It may be due to mismanagement, a failed venture, or criminal activity, but the impact was the same: Those who had money in the company lost value.
Of course, some came back; the early 1980s saw just that with the Chrysler Corporation. However, others tanked permanently, and their investors took a bath. That makes for a bad loss for those investors, but they should have been hedged against it.
The simplest thing to do to avoid such a hit is to spread your money around. Don’t invest all your money in a single stock, because it could either bottom out permanently or hit a low spot just as you planned to withdraw it. And utilize options other than the stock market to protect yourself against its rough patches.
Get Help
Forget what you see in the movies about hot stock tips or hunches about what’s going to do well. The fact of the matter is that the best way to ensure your success in the stock market is to follow the market and to work with a broker. A qualified person who really understands your goals will be able to guide you in those important decisions that will influence your financial health for decades to come.
Put your emphasis on “qualified.” Remember that there are a lot of people out there who have been successful with a move or two and have appointed themselves backyard financial advisors. Those are the investors who are really impacting your risk level because they are collectively making major moves of money that are distorting the reality of the market. Their panic sells and frenetic buys alter the value of your investments.
The stock market does present some viable options for investment, but its popularity is often its downfall. The market is crowded with investors who don’t always do the most rational thing in a given situation, and their actions can impact your bottom line even when you do everything correctly. Its performance is unmatched among your potential investment instruments, so it stands to serve you very well as you plan for your financial future. Like any financial tool, you should approach it with a wise strategy that helps you minimize risk.
