When the stock market is uncertain, you might be weary of investing. Here are some tips to slowly invest in stocks again.
- Before anything else, do your homework. Study the market of your invested company. Try to learn what you should know about that business/industry, learn about why they are doing well or why they are not.
- You should not be investing in only one company. You should diversify your portfolio by investing in stocks from multiple industries and sectors. If you invest in one industry, such as technology or financials, if something happens to that industry, your whole portfolio is going to be affected by it.
- Set your parameters based on your risk tolerance. Decide if you want to have short term investments, with high risk and high return, or maybe you won’t mind a bit of a longer term investment, with lower risk and lower return.
- Watch the market. As you do your homework, you’ll know when the time is right to invest. You’ll know when the next time that your bank account is low is coming, or you’ll realize you’re preparing for next semester’s tuition. That’s the time where you can use your money to get something back.
Move Back into the Market Very Gradually
If you have been out of the market for several years or even decades, it may be difficult, if not overwhelming, to jump back in all at once. To re-enter the market, move back into it very gradually.
The first thing you can do is consider the foundation of investing – risk diversification. You don’t want an all or nothing approach to investing. Diversify among household expenses, rental income, dividend paying stocks and mutual funds, ETFs, bonds, and of course, your 401(k). This will not only reduce your risk but also provide greater long-term growth because you will be taking advantage of up-swings and downdrops.
The next step to moving back into the stock market is to set goals for establishing a portfolio that balances your risk tolerance, risk capacity, and the time horizon. You need to think about how much you need to achieve your goals over a 10 or 20 year period. The more time you have, the more risk you can take.
Finally, you should think about keeping at least 4-6 months of emergency cash and living expenses in an easily accessible account.
Build Up Cash Reserves
In case the market just dumps, you need enough cash to cover your bills for the next couple of months.
If you have a retirement account, you can use up to 25% if you hit your retirement age.
If you don’t have enough cash on hand for that, you might need to take a part-time job to help cover your living expenses.
Invest in Funds, Not Individual Stocks
One of the most common mistakes people make in the stock market is invest in individual stocks. Investors tend to invest in the companies they know and love, which is always wise. Or they even want to invest in companies they despise because they are sure they are going to go out of business soon and they want to cash in on the profits. Such behavior means you are putting all your money on individual stocks which is a very risky way to invest.
Investing in individual stocks is like playing in the stock market lottery. You never know when you might be giving all your hard-earned money to get nothing back. It all depends upon the faith you have in the company, how much you know about it and what strategy you employ. If you keep failing in that strategy, you will become more and more nervous and shaky, making your future bets even worse.
If you are looking to make a killing in the stock market, you need to take a more organized, disciplined approach. Start by investing in smaller and safer companies. Even if these companies don’t have the potential of generating huge profits, there is great scope of generating a steady return. Make those few bucks into thousands. Grow those thousands into hundreds of thousands. Then, once you’re ready for an upgrade into the bigger leagues, invest in your favorite shares.
Invest in Lower Risk Sectors
It is wise to invest in lower risk sectors as this will help in managing your risk. When you invest you should divide your money evenly between stocks, bonds, and index fund. You are ready to go back to invest again. Try to set a buying plan so you are buying a certain set amount of stocks each month or week.
Don’t Invest Beyond Your Comfort Level
The stock market can be a scary place for anyone and investing in the stock market can be especially scary for women. The fear of taking a loss can cause a lot of women to avoid investing altogether. Taking small steps once you regain confidence has been helpful for many of my female clients in the past. The fear of the unknown can be paralyzing.
More than half of all investors are afraid to lose money and if you are like me then you will understand. I see the market as the jungle. I have no idea what is going to attack me, how fast it will move or in which direction. The majority of the time I am paralyzed from the fear. I feel like I am walking with my eyes closed and it makes for a very unenjoyable experience.
In order to regain the confidence you need to jump back in the market, you need to make sure that the amount of money you invest isn’t a lot of money. Pick an amount that you will absolutely be willing to lose and use that as your risk amount. By doing this you will lower the emotional aspect of the risk and therefore lower the fear factor. If you invest money that you are not willing to lose then you are removing the need to do your own research and focus on the key rules of investing.
No Matter What, Stay Diversified
One common mistake people make is that they look at the market as a whole rather than individual company.
Staying diversified helps you avoid that.
A great way to diversify is to set up a portfolio of mutual funds.
Mutual funds are made up of mixed assets and can be very well diversified like a stock index.
That way you’re less likely to lose everything with one bad decision. For example, you should have a portfolio made up of different funds instead of only stocks or only bonds.
That’s how you make a balanced portfolio.
But it doesn’t end there, there are plenty of other options in between as well.
Diversifying is about having of variety of stocks within the same industry, different industries, large companies, and small companies. There are thousands of different ways to mix it up, so choose the one you think would be most beneficial for you.
Keep in mind you don’t need to diversify only among stock.
You can invest in other forms of asset as well. If your aim is to build wealth, there are plenty of options to diversify.
Some people choose self help books over stocks, some people even choose real estate over stocks. With so many avenues, you’re sure to find one you like.