Considering how unpredictable the market can be, it’s tempting to park all your savings in a bank account. This is especially true for millennials, who generally show more hesitance towards investing in the stock market compared to other generations. But by avoiding investment altogether or being overly cautious, you’re missing out on the benefits of compound growth and letting your financial fears keep you from potential gains.
Investing in stocks can indeed be intimidating if you’re not careful. It’s essential to stay unemotional and keep a long-term perspective, allowing your investments time to grow and rebound from any market fluctuations.
Here are some guidelines to help you invest in stocks without getting overwhelmed.
### Understand the Basics
If you’re new to investing, take some time to educate yourself before making any purchases. Follow Warren Buffett’s example of avoiding investments in anything he doesn’t fully understand—this approach has served him well. Get familiar with terms like stocks, bonds, ETFs, index funds, asset allocation, and management expense ratios (MERs). Read some books, join a local investment group, or explore online forums like Bogleheads or Reddit for more detailed information on investment strategies.
### Minimize Risks and Expenses
Many financial experts advise minimizing investment costs to maximize your returns. High MERs and administrative fees can significantly eat into the profits from your 401k. Investing in index funds and ETFs, which come with lower fees, can offer more value. They help spread out the risk over a range of companies rather than being too dependent on a single stock. Mutual funds, index funds, and ETFs can safeguard you against specific stock pitfalls.
### Stay Consistent
Market analysts often give daily stock predictions, which can lead to emotional decisions and poor returns. Instead of trying to predict the market, invest and stay invested. Most financial experts suggest diversifying your portfolio, considering your personal risk tolerance, and keeping an eye on how close you are to retirement. A good habit is to invest a fixed amount from each paycheck or monthly business profits.
### Be Prepared
Once you have a solid savings cushion and a financial plan, decide on a small percentage to invest directly into stocks. Keep an open mind and be prepared for some losses—think of it as a learning experience that won’t derail your overall financial goals. Consulting a financial advisor can help you figure out how much risk you can afford with stock purchases.
### Pick the Right Investment Partner
Cost is a key factor in your investment success. Choose a company that offers the funds you want with low fees. Companies like Vanguard and Fidelity provide a wide range of ETFs, index funds, and mutual funds with low MERs. For money set aside for more speculative investments, use a brokerage firm like E*Trade or Scottrade, which offer affordable access to individual stocks.
If you want to buy individual stocks in specific sectors while managing your risk, consider Ally Invest. They don’t have an account minimum, and each trade only costs $4.95.