This guest post is brought to you by The Digerati Life, a dame who enjoys stock market investing and personal finance, and who loves blogging just as much!
The conventional wisdom tells us that the stock market is supposedly good for our long term savings. Financial experts tell us that it’s wise for us to invest for the long term by committing our savings in equities and bonds. Interestingly though, I’ve met several people who don’t believe in this advice, and who have some aversion to the stock market; this is not surprising given how the markets have been behaving lately.
In reality, these people actually have an aversion to the risk inherent in participating in the stock market. The thing is, many of those afraid of placing a dime in an equity investment are young and highly employable, and would be great candidates for stock market investing. Ironically, they have the profile of someone who would be able to accommodate risk pretty well, and who would be able to bounce back easily in the event of any losses. I typically encourage anyone I know who are in this position to invest, because by starting at a young age, there are great opportunities for their money to experience long term growth.
For those who are truly nervous about investing, I’ve got some tips to help you overcome your misgivings.
1. Understand how the stock market works.
I know a few people who have sworn off investing in stocks because of the volatility we’ve seen in the markets of late. But I also believe that what we don’t know well enough, is easy for us to be afraid of. For those who are open to the idea of investing, I would suggest beefing up your knowledge on this subject matter as much as you can so that you get a good idea of both the risks and rewards of investing. By building your knowledge, you’ll gain more confidence. A good place to start is by checking out resources on the web for this kind of information: these days, a good online broker or mutual fund site can provide you great resources, educational material and investing tools to help you boost your investing IQ. If you check out my reviews on TradeKing, ETrade or even Zecco, you’ll find that there’s a lot you can learn from webinars, tools and investment communities that are offered through sites like these.
2. Have enough cash savings for short term needs.
If you plan to invest, it’s important to separate your short term savings from your long term funds. The money you can afford to put away for a long time would be appropriate for equities and other assets with potential for growth over the long term. One way to protect yourself from the bouncing stock market is to make sure you’ve got enough short term savings to sustain you, so that you don’t end up having to dip into your investments when you find yourself in a pickle. I’d keep my cash cushion in a high yield savings account, while the rest of my savings can make it into an investment portfolio.
3. Make sure you are well diversified.
As they say, don’t put all your eggs in one basket! It’s a commonly used cliche, but it’s something I live by. Try to develop a portfolio that consists of various asset classes such as equities, bonds, cash and perhaps even precious metals and a touch of real estate. And try to have global representation in the positions you hold.
4. Don’t get emotional, have a plan!
Many investors become vulnerable to loss because they let their emotions get the better of them at some point. When the markets dive, they grow skittish; when the markets soar, they grow overconfident. But the best way to navigate the investment environment is to have a solid plan in place before you even put your money on the line. Your plan should provide direction on when and how you invest your money, and should also guide you on when to adjust your holdings or when to sell your positions: normally these moves are made based on the fulfillment of your financial goals.
5. Set aside a little play money.
Lots of people decide to abandon the markets because they’ve gotten burnt. And they get burned because they’ve played with stocks too aggressively at one point in their lives. I would therefore suggest that if you ever find yourself feeling overenthusiastic about stocks (perhaps due to an extended bull market), indulge yourself only a little and in a controlled fashion by having a small amount of money to gamble with. My rule of thumb is to designate 4% of my portfolio to more aggressive plays for those times I want to take a leap of faith on a stock or other investment.
image source: stuant63
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