Investing can be scary. No matter whether you have a large amount to invest or are just getting started, you are putting your hard-earned money at risk. When stocks fall, it can make you nervous and even leave you wanting to get out no matter the cost.
If you want to earn the life-changing returns the stock market can offer, you will never completely eliminate the risks of investing. You can, however, control those risks and make your investing strategy safer. The five tips below are not difficult to follow, but they can make a huge difference in how secure you feel about investing.
1. Keep it simple
Investing can be a time-consuming process, but it does not have to be. If you do not know how to research stocks or are too overwhelmed by the idea, stick to index funds. Index funds let you buy a bucket of different stocks, and their goal is to match the performance of the market indexed they are associated with. As such, if you were to buy shares of an S&P index fund, you would effectively be investing in the broad market without having to do any significant legwork.
2. Think long term
To invest in stocks successfully, you need a long-time horizon. Whether stocks rise or fall over short periods of time has little to do with a company’s fundamental business strength. If you invest with an idea of taking money out next month or even next year, you are mostly just gambling that short-term market movements will be in your favor.
Holding positions for at least three to five years is what it takes to deliver significant returns from the stock market, not trading in and out of stocks. The first rule of compounding is to never interrupt it unnecessarily.
3. Having 15 or more stocks in your portfolio
It can be tempting to buy just one or two stocks, figuring that if they hit the big time, all or nearly all of your money will earn the maximum possible return. However, the odds of actually identifying a big stock winner are extremely low if you only take one or two swings.
Having at least 15 stocks in your portfolio provides a good balance between maximizing return and minimizing risk. You will still see meaningful gains in your net worth if one stock in a 15-stock portfolio soars, but you also would not suffer too much if one company takes a big hit.
4. Have a cash cushion
Setting cash aside does two things for investors. First, it gives you a source of cash for expenses without having to sell stocks at a potentially bad time. Second, if a big investing opportunity arises, having cash lets you buy stocks at the perfect moment.
The size of your cash cushion depends on your needs. Younger investors should strive to have three to six months’ worth of expenses set aside for financial emergencies. For retirees, having cash to cover several years of spending takes away all of the risk of having to sell in a down market.
5. Invest in thirds
In general, the sooner you invest, the longer your money has time to grow. However, it is natural to fear that you are going to buy a stock right before it goes down.
If you are concerned about taking a full position in a stock all at once, one solution is to take your available cash and divide it into thirds. Invest one third right now, and then plan to invest another third a month or two from now, and the final piece a month of two after that.
More often than not, you will end up paying a little more for those investments. However, you will sometimes be rewarded for taking an incremental approach, and regardless, it will leave you feeling like you are taking on less risk.
Stay Calm and Invest On
If you are nervous about investing, rest assured that you are not alone. But that does not mean you should not invest. Follow these five tips, and you will feel more confident than ever in your investing efforts.