Today’s guest post is from Anna of Dollar Stacker. She is a twenty something personal finance junkie, saving guru and real estate enthusiast. Happy and educated, European-born, Canadian raised. Anna is a full time banker and an optimist. She says, “My blog is my outlet to share my financial successes and experiences, the ABCs of banking, the pursuit of happiness and to motivate & inspire others in their personal financial success!”
The investment market has proven to be sour at times, causing hard losses, disappointments and a few Macaulay Culkin faces. Looking back there was the Great Depression, the Enron scandal, the 2008 Recession and maybe a few more major dips in
between. It’s no wonder many are weary of what the stock market has to offer. These events have caused many of us to throw in the Wall Street embroidered towel and keep our money in a regular savings account.
So how do you get over your stock market fears and invest with confidence?
The common perception of the stock market is it’s scary, unknown, volatile, risky and all these uncomfortable words you don’t want to associate your hard earned money with. The truth is, these perceptions are simply stereotypes.
The trick to welcoming the investment market with open arms is learning about the major past events and its lessons learned over the years.
Starting with the most recent crash of 2008-2009. The housing bubble, which led to many losing their retirement savings, their homes and jobs. Yes, it’s true some stocks really did vanish without a trace, however these stocks were likely too risky for the average investor Joe to begin with. Many stocks did regain their composure in later years but due to the scare, many people pulled out too early and missed out on the climb backs.
1. Time in the Market
This brings us to Investing Tip #1 – Time in the Market. A professional investor, much like your nosy neighbour, always knows what’s going on. A professional investor’s job is to know the market inside out, make predictions, take risks and lose sleep watching the market. Since many of you reading this, are not professional investors, which means you are better off investing for the long term. Investing for the long term, I would say at least 3 years, decreases the volatility (the market’s shakiness) because it’s averaged out over a longer period of time. In the chart below, although there are major dips in some years, you’ll notice the general trend is upward over the 20 year mark. The longer you are invested the better the average return is.
2. Timing is Everything
Investing Tip #2 – Timing is Everything. I’m sure you have heard the rule of them all, “buy low, sell high”. In the stock market crash of 2008-09 many investors ran with their losses, withdrew their investments, only to see many of the stocks rise back up.
The chart above, specifically the red line, is the Standard and Poor’s 500, which represents 500 large companies having common stock listed in the New York Stock Exchange or NASDAQ (another stock exchange index). I wanted to show you this chart because the S&P is considered to be one of the best representations of the U.S. stock market.
Taking a look at the year 2008, you will see that the stocks significantly decreased in value, or “crashed” as we call it. At this point, many novice investors decided to withdraw whatever was left of their money, to avoid an even greater loss. For many, the greater loss was the fact that they withdrew, because over the following years, the stock market rose back up to an even higher level than before.
Timing is everything, sprinting away when the stock price drops only means you are probably not ready to invest at all or know very little about the stock, which brings us to Tip#3.
3. Research the Investment
Investing Tip #3 – Research the Investment – Just as you wouldn’t buy a car without reading about its features, fuel efficiency and warranty, don’t blindly invest into a company simply because you heard it’s a “good one”. Read the company’s quarterly financial statements or get an accounting buddy to do it for you. Looking at the financial statements, will show their quarterly profits/losses, assets, debt and overall picture of the company’s financial status, it’s like looking into your bank account, you know when you’re in trouble.
Read up on the news about the company, what’s happening with them lately? Kind of like that celebrity gossip column we read time to time, get to know the company and its reputation, but do not read into every word, some of it can just be “fluff” to create buzz.
Check what professional investors are saying about this investment, just as you would read the reviews or watch the trailer before going to see a movie, check the reviews on the stock. The reviews can be easily searched online, a good resource is nasdaq.com but there are lots more out there.
4. Simple is Best
Investing Tip #4 – Simple is Best – Again, many of us are not professional investors and with full time jobs, families and a whole bunch of other things to focus on aside from keeping up with the stock market! Making it simple is the way to go, don’t worry about keeping track of irrelevant data points or predicting results. Simple means:
- investing with a long-term horizon….at least 3 years
- focusing on companies with economic moats…. which means a competitive advantage over other companies (do your research!)
- margin of safety….which means buying a stock price that is probably undervalued and has potential or intrinsic value to increase (again…do your research!)
5. Investor Profile Questionnaire
Investing Tip #5 – Complete an Investor Profile Questionnaire – Similar to a personality test, with an investor questionnaire you will know which investing category you fit into. The categories range from very conservative investor to aggressive.
Investing into the stock market is definitely not for everyone, some people prefer the more conservative ways. There are different types of investments out there such as mutual funds, Guaranteed Investment Certificates (GICs), government bonds and the good old savings account. Filling out the questionnaire will allow you to know which investments you will feel most comfortable with based on your answers. The questionnaire is available online or at your local bank.
In a nutshell…
- Time Horizon – How long will it be before you need to withdraw the money? Knowing the time horizon of your investment will help with choosing the right investment.
- Goals – Why are you investing? Is it to save for a house, retirement, special project, vacation? Knowing your goal will help you figure out the time horizon and the type of investment that’s best suitable for the goal.
- Age – Which stage of life are you in? Nearing retirement? Just finishing college? The younger you are, the more time you have to take on more risk and volatility in the market.
- Type of Investor – Complete the investor profile questionnaire to figure out which type of investment is best suitable for you.
- How much – How much will you be investing? Is it better to invest a little bit at a time or all at once? Some types of investments have a minimum amount, knowing how much to invest may help figure out which investment is best suitable for you.
There are great investment opportunities out there, follow the above investing tips and you are bound for success!
Great tips. Dollar cost averaging and trying to add even more whenever the market drops has been great for me. Plus, over short runs, investing in great companies when bad news hit. I was lucky to get some shares of Disney during the later Eisner years when people were doubting the company. I wish I could have bought more!