How Risky Can The Stock Market Be?
Half of Americans have $0 invested in stocks. Many of them don’t have spare money to invest, but some might think it’s just for risk-takers. Today, you can buy stocks in companies of all sizes, while believing those businesses will do well, and the value of your shares will increase. Smaller, newer firms are more risky, because there’s a big chance they could become a bust. Larger, more established companies are not as exciting, but they’re more stable.
If you look at the stock market up close, it can seem like a gamble. The S&P 500 Index is a measurement of how 500 of the biggest companies have performed over time, and since 1928, it’s grown by an average of 10% per year. Sure, there are still ups and downs, but what looks unpredictable up close from a wider perspective is a different story. So how do you get your portfolio, the collection of stocks you own to reflect that steady increase? The two strategies we can use are diversification and long-term investing. Stock diversification means owning stocks from a lot of different types of companies, which protects you from the volatility of any specific market. And long-term investing, owning stocks for at least 10 years, protects you from the volatility of a bad day.
Behaviorial economist Richard Thaler recommends not even tracking your portfolio at all. People who check the price of their shares tend to panic and sell them when they temporarily dip, which basically gurantees that they sold them for less than they purchased them. The number one no-no in the stock market. Even a diversified portfolio can take a dive, and understand when you fall on hard times you need money now, not 5 to 10 years down the road, when the market goes back up.
As companies continue to grow and the cost of living gets more expensive, if your savings are not somehow tied to the overall growth of the economy, you can get left behind. A lot of people buy and sell stocks through companies called brokerage firms. It’s easy to set up an account, and they offer guidance on how to invest your money. Now you can always pick stocks yourself, but if you’re new to it that can be as risky as a slot machine.
Mutual funds is another way to get stocks. These are bundles of stocks that are designed to be diversified, which spreads out the risk, and makes them less of a hassle. The smartest first step is to seek the help of a trustworthy investment advisor, who can help you make a plan that best fits you.
