During the recession, you’ve undoubtedly heard financial gurus talking about what a good time it is to buy stock. If you’ve ever been tempted to give the stock market a try, you might be convinced that a bad economy is a signal for you to take that money you have in your emergency fund and try your chances on purchasing stock and see if you can make a little quick money.
If you are currently living off your savings or expect to have major expenses in the near future such as medical surgery or replacing a car, it’s important that you have investments that can’t lose value, such as money market accounts or CDs. Pay attention to your own sense of caution.
If you need your savings to grow, however, you can’t always play it purely safe. Even though the future of the stock market is uncertain at the moment, the historical average increase of stocks over several years is about twice that of bonds. Having some of your money in the stock market can help you protect all of your money against inflation. Taking a chance on the stock market is not necessarily a bad thing if you follow some simple advice. The kind of financial risk you are prepared to take and the return on your investment that you hope to get will influence the kinds of investments you make.
Here are some suggestions that will help you stay in a comfortable risk zone—and let you sleep at night.
1. Do your research and don’t invest until you have. Your first stock investments should be built on a solid foundation of knowledge and risk-free funds that will help you be assured you won’t lose everything your first time out. Proper insurance coverage and a significant emergency fund that you promise not to touch should be in place before you make any investments in stock. Only when you have that in place are you ready to start investing.
2. Divide your investments into long-term and short-term options. As the old saying goes—don’t put all your eggs in one basket. Investing in stocks should be viewed as another way to help you achieve your long-term financial goals, not as a get-rich-quick scheme. For money that you will need within two or three years, a solid savings account or bank CD are much more appropriate.
3. Don’t invest large proportions of your money in anything that you don’t feel comfortable about. Find out as much as you can about the strengths and weaknesses of the company you are considering investing money in. It really is true that there’s no such thing as a free lunch or an overnight success. The bigger the promised reward, the bigger your risk. The recent news stories about people losing millions of dollars to fraudulent investment funds should be ample warning. It seems like anytime a real opportunity comes along for people to better their lifestyle, there’s someone who’s willing to find a way to use it to take advantage of people. There’s hardly a legitimate form of investment that isn’t considered fair game by the unscrupulous. Stock investing is no exception. Unfortunately, there are investment scams out there just waiting to take your hard-earned money off your hands so beware. That doesn’t mean you can’t try some high-risk options; just don’t do it with anymore than what you could comfortably lose.
4. Make sure you know how to sell the stock when the time is right. Some tangible investments, such as antiques and gemstones may be easy to buy but selling them requires specialized assistance. You can really get stuck “holding the bag.” The same goes for stocks. Be sure that you have a knowledgeable stockbroker giving you advice on how and when is the best time to sell your stock. If you want to get the most benefit from your stock-investment experience, take the time to do the legwork. It will more than reward you in the long run. But plan on holding onto your stocks for at least a decade.