The economy is looking better by the day. Yet most people are still trying to save every penny possible. Surprisingly few are searching for ways to make more.
What’s better? Making more and adding it to your income, or suffering through always having to spend less?
- Yes, you can try getting a better job.
- You can try selling all your stuff.
- You can try getting a second job.
Or you could make your money work for you.
Many people won’t even consider it; for them, investing is too risky.
Risks Often Outweigh the Gains
Yes, you can take your $500 bonus and stick it in your savings account, then let it earn a few cents every quarter. Or you could take a chance and buy stocks with great potential that will earn you much more.
Of course, investing in stocks is far from a guaranteed return. If you don’t know what you’re doing, investing in stocks can put your savings at risk. It is possible to win big with stocks, even on accident, but it is far more common for the inexperienced to lose, and that loss might be immediate, and leave devastatingly painful aftermath.
This core truth keeps many would-be investors playing it safe, since even with the economy crawling tentatively forward, they are hesitant to lose all their hard-earned cash with nothing to show.
Fear is the Winner
Many people are so afraid of their potential losses that they’re never willing to suffer through the temporary discomfort of risk to benefit from the wins. That awesome $500 bonus you used to buy stock in Farm Fresh at a whopping $8 a share, while smiling, just tanked to $3.51 a share, losing you more than half your money when you were guaranteed at least a small win at the bank.
This is a legitimate fear. Every penny you set toward your future puts you one cent closer to getting there. And knowing your future is taken care of helps you truly enjoy your present. But while there are zero guarantees when it comes to buying stock, there are several ways to invest smarter. The following five strategies can help you make smarter stock buying decisions.
Strategy One: Study stocks and stick with what you know
Once you have a solid understanding of what makes stock rock, don’t take unnecessary risks with options you’re unsure about. Taking uncalculated risks like this is a near guarantee that you will quickly lose your $500 bonus.
Strategy Two: Consider dividends
Dividends are excess earnings that companies distribute to their shareholders, but not every stock offers these regular streams of income. Historically, a significant portion of stock market returns have come from dividends, so don’t overlook the seemingly tiny yield..
Strategy Three: Don’t follow the trends
Warren Buffett doesn’t waver when tough times hit his investments. Because he sticks to his strategies, he wins more than he loses. Invest in what you believe in, and then believe in your investments.
Strategy Four: Diversify
If you invest all of your $500 bonus in the same area, and in the same type of stocks, you’re bound to lose when/if the bottom drops out. Diversify by investing in different industries, and you’re more likely to avoid losing it all.
You could be the biggest Apple fan in the world, and they may be as profitable in 10 years as they are today, but they might not be. Maybe they won’t even exist. Hard to believe, but possible. Investing 100% of your money with no diversification is always a mistake. Invest in different niches to safeguard a segment of your investments.
Strategy Five: Look long term
There are always a ton of uncertainty in the short term, which makes predicting near term movements almost impossible. But if making bets on individual stocks is part of your plan, then always be investing and thinking about results for the long term.
Stock picking is extremely difficult, and this article obviously just offers the tip of the iceberg. We recommend most people invest in passive index funds for its simplicity and effectiveness in achieving solid returns. But if you are a stock picker, what advice would you give?
- E*Trade IRA - Official Site
{ 6 comments… read them below or add one }
I personally go with mutual funds like the Vanguard Balanced Index Fund for my mid term investments in my taxable account. I like mutual funds better because I don’t have the time an expertise to pick the best stocks.
Some good advice here on building and maintaining a portfolio.
One thing that caught my eye is the mention of Warren Buffett and hanging on to things long term like he does. While generally a wise strategy, it’s important to note that Warren doesn’t just hold because its his strategy, but because he truly believes in his people.
He really invests in management teams rather than companies and as long as he thinks he has good people and believes in their vision then he stays with them.
So if your stock is tanking and the people at the top do not inspire any confidence for you then don’t hang on just because it’s what you think Warren would do.
You can always follow where Warren Buffett has its shares and buy and sell when he does it.
As a general note on investing, here’s the way I see it: In life you are either a debtor or an investor. There is no middle ground. To be one, you pretty much have to let go of the other (with the possible exclusion of a first mortgage).
Everyone’s goal, in one way or another, is financial independence. That means graduating from debtor to investor.
When you’re an investor, your financial life depends on your investing. Yes, you can leave it to someone else, you give up a lot of return. Would you ask someone to go see your boss and ask for a raise? Me neither.
That’s why I took the bit between my teeth and learned about investing. It’s my life and if that will enable me to do better, I need to buckle up and learn.
Investing also could be rental properties. But whatever feels most comfortable to you, or the least uncomfortable right now, pursue it with all you have. Your (financial) life depends on it.
The good news is investing is not rocket science. All it takes is not being lazy.
It was only a few years ago that everyone was convinced that the stock market was a sure thing. Now most people are really afraid of it. I guess the silver lining is that the recent bear market installed some caution in many people. In the long run, however, people are going to be quite disappointed with inflation adjusted returns from their savings accounts.
You might even say investing is the ONLY winning retirement strategy. It’s extremely difficult for the average person to develop significant retirement savings without investing in stocks, bonds, and alternative assets.