Global markets have been on a wild ride lately, and there is no arguing that it takes a strong will to invest your money when so much remains uncertain. The European debt crisis, slow global growth, stubbornly low housing prices, and high unemployment have caused investors to be highly sensitive to any and all news concerning the economy.
While there is no doubt that it is possible to make money in the stock market, the question for many investors is simply, “how”? Last week saw a broad market sell-off that took out corporations and sectors indiscriminately, based on news that the global economy has hit another rough patch and could be headed into another recession.
With so much uncertainty, it is tempting for investors to stay out of the market altogether. While bank savings accounts, CDs and money markets are certainly safe, with interest rates near zero, there is the very real risk that your savings could be outpaced by inflation. Your goal when saving and investing is to make your money work harder, and historically, the stock market has been the only real path to building lasting wealth.
In Order To Make Money In The Stock Market You Need A Plan
In order to make money in the stock market, you will have to do a few things first. Only with the proper education, planning and mindset can you realize success in an uncertain market. An investor must also have a thorough understanding of their own personality, risk-tolerance, and available risk capital prior to investing.
The harsh truth in investing is that you can not make money in the stock market without assuming some level of risk. With high risk comes high potential rewards, but keep in mind that all risk is not created equal. Purchasing stock in a company or industry that has historically been stable but for some reason is being battered by the market – think BP post-gulf oil spill – is a different type of risk than investing in penny stocks. Finding the type of risk that is right for you will be the difference between being successful in the market, and losing money.
It is usually best to approach investing with a long-term plan. With an investing plan that focuses on the long-term you have a crucial weapon in your arsenal – history. While a daily, weekly, or even yearly chart of the market may seem fraught with steep hills and valleys, when you view the market in a longer time frame of five to ten years, you can see that stocks typically trend higher over a longer period, with the prime buying opportunities lying in periods of high volatility.
It is typically best to start investing your money as early as possible, but keep in mind that it is never too late to put your money to work. As an older investor, you can make money in the stock market if you are mindful of how much risk is in your portfolio, as the closer you get to retirement, the less time you have to recoup any potential losses.
Make Money In The Stock Market With A Diversified Portfolio
Your goal to make money in the stock market can be realized by educating yourself thoroughly on each and every potential security purchase, as well as by diversifying your portfolio holdings to give yourself broad market exposure. The advent of ETFs, or Exchange Traded Funds, has made this task considerably easier, as they offer broad market, as well as sector-specific exposure, combined with low fees.
ETFs compound the benefits of a mutual fund, with the tradability of a stock, and there are literally thousands of ETFs to choose from. Although these funds certainly simplify the diversification process, as with all investments, they do require research into the funds performance and holdings and must be monitored and reviewed periodically.
Choose an ETF that has a broad mix of securities and sectors, and also pays a stable dividend. ETFs such as the SPY and the DIA track the S&P 500 and the Dow Jones Industrial Average respectively, and offer investors the broadest exposure to equity markets. Keep in mind that while these ETFs track a broad market and can be fantastic long-term investments, they will be subject to the high levels of volatility that is seen in today’s market and may not be suitable for every situation.
Be skeptical of ETFs that are too narrow or industry specific, have a poor history of performance, and/or trade on low volume. These types of ETFs can be extremely volatile, and could cause more harm than good to your portfolio.
No matter what anyone tells you, there is simply no substitute for proper planning and maintenance when it comes to your financial future. Do not let fear and emotion keep you from realizing your dreams of building and retaining real lasting wealth, plan for volatility now, and realize the benefits later.