Investing can seem intimidating for those that don’t know much about it. If this is you, read on and I promise you will feel less intimidated. I am going to discuss several topics including long-term investing, diversifying your portfolio, and dollar-cost averaging.
Many people think of investing as a “get rich quick” method. People want to buy stocks at their lowest price and sell them as soon as they go up. However, frequently buying and selling stocks for a quick profit is incredibly complicated and can be super risky. It’s complicated because timing when to buy and sell stocks at their lowest and highest prices is impossible. It also requires a ton of research. Similarly, it’s risky because it is impossible to predict the short-term behavior of a stock.
Long-Term investing eliminates a lot of the risk. Looking at the historical performance of the stock market, you will see that it increases in the long run. Yes, there are small dips, such as the recent 2008 recession, but the stock market always rebounds to hit historic highs. Investing long-term (10+ years) will allow your investments to endure the bad periods of the stock market.
Short-term investing can also get expensive. Buying and selling stocks often come with transaction fees. Remember, your earnings decrease every time you pay a fee. Also, you are hit with tax penalties if you sell stocks within one year of buying them.
Diversifying your Portfolio
“Diversifying your portfolio” is the fancy language for not putting all of your eggs in one basket. For instance, if you are going to invest in stocks, you want to invest in a variety of stocks as opposed to a single stock. Investing in a single stock will cause your money to go as that stock goes. To avoid losing all of your money due to the failure of a single stock, you should invest in various stocks.
One simple way to diversify your portfolio is to invest in index funds. Index funds are managed by a fund manager, who invests the fund’s money in several stocks. The fund is designed to mimic the performance of an index. An example of an index would be the S&P 500. The S&P 500 is based on 500 large companies listed on the New York Stock Exchange or Nasdaq. Investing in index funds is the easiest way to diversify your portfolio, and you can even diversify the index funds that you invest in.
The dollar-cost averaging method takes away the stress of figuring out the absolute best time to invest in a stock or fund. When you use this method, you will be investing the same amount of money in set increments of time. For instance, if you plan on investing $6000 in a year, instead of investing it all at once, you would pick the 1st of each month to invest $500. This is a win-win situation because if you are buying a stock that is steadily increasing in price, the stock you picked is obviously doing well. However, if your stock is decreasing in price, you will get more shares for the amount of money you spend. In the long run, your cost-per-share of stock will average out because stock prices are always fluctuating.
To sum this post up, remember that long-term investing will be the surest way to sustain a steady growth of your investments. Historically, the stock market always does better in the long run so you shouldn’t panic and sell during bad stretches. Instead, endure the bad periods until the market recovers and buy shares will the prices are low. Diversifying your portfolio will ensure that you don’t put all of your eggs in one basket and limit your risk. Finally, dollar-cost averaging will eliminate the stress of timing your investment purchases and will average out your cost-per-share in the long run. If any of this wasn’t clear or easy to understand, feel free to leave a comment and I will try to explain it even more. Also, if there are any topics that you’d like to learn more about, feel free to leave suggestions in the comments as well!