PERSONAL FINANCE: Don’t miss out on opportunities in the stock market
Far too many people
are still sitting on the sidelines and are hesitant about investing in
the stock market. Because of their strong aversion to risk and the fear
of loss, they are watching opportunities pass them by. The stock market
can seem intimidating for the new investor and for those who have had a
bad experience in the past; but it needn’t be. Here are a few tips as
you consider investing.
Set yourself clear goals
Before you put any
money down at all, set yourself clear goals. These may include funding
your children’s education, making a down payment on your new home or
saving for your retirement. Investing is a journey towards achieving
your goals. Where you have concrete goals that you are working towards,
you will not be easily swayed by market hype and volatility. Your own
unique circumstances should ultimately determine how much, how and when
you should invest.
Build your knowledge
One of the best
investments you can make in yourself is to take the time and trouble to
improve your knowledge of investing. There is a plethora of information
and research by professional analysts and experts, which will be a good
guide. Investment seminars are also available that can develop you and
point you in the right direction. Resolve to take some time to educate
yourself. You will be surprised to see how much you can learn in a year.
How much risk can you take?
How much risk can
you endure? It is important to be aware of your attitude to risk and
that stock market investing comes with risk. Stock market investments
are not guaranteed. This means that although you are likely to make
money over the long term, you can lose your investment.
If you can’t bear
to take much risk and would be devastated by any loss, it is best for
you to put only a small portion of your investable funds in the stock
market and the balance in money market investments. Bear in mind
however, that when it comes to money, sometimes playing it too safe
isn’t necessarily the winning formula. If you invest all your money in
guaranteed investments, they are not going to keep pace with inflation;
earning 3-4% on your savings will make it challenging to achieve even
the most modest financial goals.
Invest for the long term
How much money can
you really afford to put away for say 5 years and beyond? When you
think of investing in the stock market, adopt a long-term strategy
rather than looking to make a quick profit. Avoid investing more than
you can comfortably afford to be without during your time horizon.
Historically, stocks have generally outperformed other investment
classes over the long term. However, in the short term, the market can
be unpredictable and carry a greater risk of loss.
It is impossible to
predict accurately what the stock market will do tomorrow. Sometimes
the stock market makes sense and at other times no one can really
explain why it is acting in a certain way. Many factors come to bear as
to what the market will do, such as market trends and economic
forecasts, the political situation, investor perception, emotions,
greed and fear.
“Don’t put all your
eggs in one basket!” Don’t put all your money in one stock and don’t
invest in stocks alone. When it comes to buying shares, diversification
is essential. Instead of investing all your money in just one or two
companies, its best to diversify by buying shares in different
companies and sectors.
It is also
important to diversify your investments across different asset classes
including real estate, money market accounts or bonds. That way, if one
asset class under-performs, you will have some exposure to other assets
that might do well. It is unlikely that all segments will perform in
exactly the same way and decline together.
Get Professional Help
Most of us do not
have the time or expertise to make sound investment choices without the
help of a professional. A professional advisor will work with you to
create an investment strategy that suits your unique situation and your
risk profile to ensure that the appropriate investments are in place
for your changing circumstances. Once you become more experienced, you
can become more involved.
Allocate a part of
your investments in a systematic investment plan. Instead of trying to
time the market, invest on a regular basis say monthly, or quarterly in
an appropriate vehicle, and even when your finances are stretched. It
is a particularly useful tool in a volatile market as you can reduce
the average cost of your shares by purchasing more shares when prices
are low, and fewer shares when they are high. A consistent disciplined
approach takes away the speculative element of investing and reduces
stress and fear.
Invest in Mutual Funds
If you are new to
investing or don’t have that much money to invest, a mutual fund may be
the most convenient way to invest. A mutual fund pools investors’ funds
and manages them in stocks, bonds, money market instruments, etc. The
benefits of mutual fund ownership include the wide variety of
investment types to choose from, having a diversified portfolio of
stocks, bonds and cash, and having access to professional management,
usually the prerogative of substantial investors.
Be realistic about
your expectations of the stock market. If you set reasonable long-term
profit expectations for your investments, you will be more accepting of
the inevitable periods of volatility. If you stay the course, and
continue to build upon the foundations of a sound investment strategy,
you can come closer to your financial goals. Depending upon your
particular circumstance, your age and time frame and your overall
financial plan, do consider putting at least some portion of your money
in the capital market; it still offers the best prospect of real long