Are you a meticulous planner who enjoys keeping track of your investments? Are you someone who needs to feel comfortable that you can predict your earnings for the next month, year, or decade? If so, investing in the stock market is probably not your best choice. The stock market is notoriously unpredictable and, at times, volatile. This article reviews questions you should ask yourself before investing in the stock market.
Investing is the process of setting aside money that you do not need now and having it work for you to reap your financial reward in the future. Investing in the stock market is a popular way to start investing.
What is your current financial situation?
Take a thorough inventory of your budgeting, savings, and spending habits, as well as how you handle debt. Do you have an emergency fund set aside? Before investing, prepare for the possibility of losing your job or experiencing an economic downturn.
Have you paid off all high-interest debts? Verify that the predicted rate of return on your investment exceeds the interest you are paying on your debts. If it doesn’t, pay off your high-interest debts before investing. You do not want to have to sell off your investments to pay back your debt.
What’s your risk tolerance?
The more risk you are willing to take, the more potential you have to get a higher return on your investment. But you want that to be a calculated risk.
Determine how much risk you can afford. For example, what would happen if one of your stocks goes to zero? Would you be able to recover financially? If you cannot afford to take a risk, don’t do it.
Diversifying your portfolio is the most effective way to reduce your risk. If you invest in more than one asset class, it is less likely that all your investments will be affected by a downturn in the market at the same time.
Consider investing in:
- Stocks
- Bonds
- Real estate
- Commodities
The ups and downs of the stock market can be emotionally taxing as you see the value of your investment rising and falling. Diversification can even things out, so the total value of your portfolio does not fluctuate as much. Stocks tend to present the most risk but have the highest potential for return. Bonds, on the other hand, tend to be the opposite. Securities in a single asset class behave similarly. Diversification can help stabilize your portfolio.
Making rash decisions based on an unanticipated increase or decrease in one of your assets might derail your financial planning and jeopardize your ability to meet your financial goals.
Is this a good time for you to invest in the stock market?
Markets usually rise over time, but there is no certainty that this will happen or when the trend will reverse. So, the longer you keep your money in the stock market, the less you have to worry about daily or even annual patterns.
As soon as you have discretionary income to invest, make a practice of investing it regularly and for a defined period of time. If you do this, your investments will grow over time, and you won’t be distracted by short-term changes in the market.
What’s your long-term goal?
When you are preparing to invest, you should also identify your long-term goal for the investment? For example, what return on investment are you expecting? Will you be selling your stock to finance another project?
Understanding your goal before investing can help you determine how conservative, aggressive, or diversified your investments should be. It can also help you determine when you should make changes in your plans as you get closer to reaching your goals.
If you are looking to invest now for a retirement 30 years into the future, you can invest in a diversified portfolio of stocks and bonds and let it sit, a buy and hold strategy.
If you are investing for a short-term goal, you may consider an investment portfolio with less risk, such as one heavy in short-term certificates of deposits and money market funds.
What are the costs associated with the investment?
If you lack any of these—time, experience, or inclination—your investment is likely to perform better under an investment expert’s watchful eye. With that said, it is important to ensure that you understand the fee structure your financial advisor uses. High management fees can extend the time it takes to reach your financial goals. In addition, watch for transaction fees associated with trading stock. The fees can add up over time.
There is no one-size-fits-all guide to investment. Working with a wealth manager can ensure you make the best financial decisions for yourself and your loved ones.
