Two kinds of people who make big mistakes in the market. There are the ones who are too scared to invest and the ones who invest with no fear at all. Here are three tips that will help you overcome your fear… or lack of fear.
You aren’t going to beat the market
Regular folks, like you and me, aren’t going to beat the market year after year. We just aren’t, and the harder we try the more likely it will be that we actually get lower returns than we would have if we just buy and hold. Most of the investment talk out there is for those people who think they can beat the market. All the magazines, websites, books, TV shows, and talking heads are there for people who are trying to beat the market. Buying and holding doesn’t get much press because it’s pretty boring. But boring is just what you need when it comes to investing. Drama = Risk
So if you can’t beat the market then that means the best you can do is to match the market. Go up when the market goes up. Go down when the market goes down. A mutual fund that matches market returns is pretty great thing in my book.
The market will go up over a long period of time
If you are going to invest in the stock market with a buy and hold position you need to truly believe that the market will go up over time. Not necessarily over the course of one year, but over a long period of time. Say 5 or more years. If you are invested in a mutual fund that tracks the stock market as a whole and you plan on holding that investment for 10 years then you can feel pretty confident that you will come out on top.
A great way to invest over a period of time is with dollar cost averaging. Putting small amounts of money into your mutual fund each month allows you to take advantage of the dips in the market. It’s not a bad thing when prices drop. If you have faith that the stock market will rise over time then price dips are nothing more than the stock market going on sale.
If you need the money in the next 5 years it should not be in the market
Ever hear the story of the person who had to put off retiring because they lost money in the stock market? Or the little old lady who is destitute now because her retirement accounts dropped in value. Guess what? That money shouldn’t have been the stock market to begin with! If a drop in the market would be devastating to your entire financial plan then that money should be protected.
It’s not a big deal if the market takes a hit when you don’t need the money for 5 or more years. You have plenty of time to recover from any ups and downs in the market. You want to go into the market slowly with dollar cost averaging and leave the market slowly too.
If you keep these concepts in mind when you go into the market you will save yourself a lot of headaches down the road.
Photo Credit: JD Hancock