One of the best ways to build your wealth is by investing. When you invest, you take your money and put it to work for you. You purchase shares in different assets and (hopefully) receive a portion of the gains in return. Investing is one of the financial keys that can lead to a better future and a successful retirement. However, you need to be careful when investing. Ultimately, it’s always a bit of a risk. Your funds could end up actually becoming less value. In the worst case, they could disappear entirely.
Whenever you invest, you are risking potential loss to court potential gains. Historically, the markets always go up over a long enough timeframe. In the short term, though, it can be a roller coaster — especially if you’re investing in volatile markets. As you prepare to invest in 2021, here are five things to keep in mind.
Stock Picking Isn’t for Everyone
The first thing you need to realize is that individual stock picking isn’t for everyone. The GameStop/Reddit mania is all over the news these days. At first glance, it can seem easy to strike it rich just by buying the same stock as many others. After all, plenty of amateur investors made nice profits buying and selling $GME.
What they don’t tell hear about as often is the people who lost a ton of money. At least one professional hedge fund that is said to have lost $2.7 billion betting against GameStop. There are countless others too, including so-called “retail investors” who missed getting in early but bought the stock anyway. After ballooning up to over $350 per share, it settled in a week later at $90. How many people bought at the top, thinking it would continue to rise? Investing in a single stock is like playing the lottery. You can get lucky, sure. You can also lose your life savings and more.
To be able to sustain wins over the long term long term, stock picking requires a lot of research. Additionally, when you pick single stocks, you are hanging more of your future on a few investments. This isn’t a wise move. For every GameStop story, there are dozens more “promising” stocks that went nowhere in decades. Picking stocks works really well for some, but it’s not for everyone.
Many ordinary investors do better by investing in index funds or ETFs. These investments follow the performance of a group of assets, rather than just one. This type of diversity is very helpful. It also reduces the stress that comes with stock picking. An all-market fund allows you to share in gains made by an entire market, rather than just a single company.
Remember Your Financial Plan and the Big Picture
It’s always important to remember your overall financial plan. Investing isn’t meant to be a short-term windfall. It’s a big picture type of financial commitment. It can be easy to get caught up in the day-to-day fluctuations of market volatility. Just remember that the markets tend to smooth out over the course of time. Instead of worrying about every uptick and drop, think about the long-term potential.
Before you abandon a financial plan, you need to consider whether or not you are reacting out of fear. A dip in the stock market isn’t always a solid reason to change things up. Take a long view and remember the big picture. If you’re not planning to retire for another decade or two, don’t stress about fluctuations. As long as you focus on those items, you will be far more likely to create a portfolio that helps you reach your long term goals.
Equities Don’t Go Straight Up
If you only recently started investing, you might think that the stock market only goes straight up. However, that’s far from the truth. Stocks do tend to have more up years than down. However, large market drops can be devastating. The onset of Covid-19 last year was really bad for the markets. However, many people got through without panicking because the drop and subsequent rebound happened so fast.
The Great Recession from 2007 to 2009 was harder to stomach because it lasted 17 months. One of the worst crashes in recent memory was the dot-com bust in the 90s, that lasted two and a half years. If you go back further in history, some declines lasted even longer. Will you have the stomach to stay invested in the assets you picked if their value keeps declining for years on end? Prepare yourself for stretches of bad news.
You Won’t Know How This Year Will Go
We can’t predict the markets. Nor can anyone else. Everyone is suggesting this year will be another banner year for the stock market. That people will let loose, spending wise, after the economy reopens, since we’ve been cooped up for so long. But as Jack Bogle, the late founder of Vanguard once famously said, “Nobody knows nothing.”
Plenty of people get their predictions right once or twice. However, it’s mighty hard to read the direction of the market consistently. You not only have to predict events correctly, you also have to predict exactly how and when the market will react. Plus, you have to outperform a buy and hold investor by a wide margin just to break even, since you have to pay short term tax gains every time you buy and sell. In short, don’t assume you know what will happen. The Redditors who were pumping up GameSpot expected its price to hit $1000 per share. It barely got to $400 and crashed back down quicker than they expected, leaving many with substantial losses.
Diversify — Stocks Aren’t Your Only Option
Stocks tend to have the highest long-term potential. However, there are other asset classes to invest in that can dampen the volatility of an all-stock portfolio. Consider investing in bonds as well. Depending on your risk tolerance, you can also add real estate, commodities, and even cryptocurrencies into the mix. Take the time to understand and determine your risk tolerance. Then figure out how different assets generally react to the markets. You need to know how they work if you want to be able to use them to best build your portfolio.
You should consider the ways that different assets can be used. It’s possible to find index funds and ETFs for other types of assets. Remember that you aren’t solely confined to stocks when it comes to investing your money. With the right planning, you can put together a balanced portfolio to see you through tough times. That should help you reach your ultimate goals. The coming year of 2021 is shaping up to be very interesting. We have a new president in the White House and will (hopefully) be seeing the light at the end of the pandemic tunnel. The markets have been at all-time highs lately, but that could easily change. We sure hope it keeps going higher, but nothing is guaranteed.
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