For a lot of people, investing in the stock market can be a pretty scary task. There is always a chance that you could lose your investment. However, this shouldn’t be something that holds you back. If you had invested shortly after the stock market bottom in 2009 you would have almost tripled your investment.
Investing is all about having a sold plan and following through with that plan. Do you want to take a little extra risk? Are you looking to play it safe by investing in dividend stocks or bonds? Having a plan will help eliminate second-guessing your decisions.
If you are just getting started investing then here are three tips to help you successfully navigate the stock market.
Identify your goals
As I mentioned before one of the most important parts of investing is to have a solid plan and set your goals accordingly. List every financial goal that you have for the next five years. Are you hoping to buy a new house? Are you looking to start saving money for your child’s college education? Write down all of your goals and put them in order of importance.
Currently my major goals include buying a new house in the next year, contributing to my daughters college fund (16 years until she will be a freshman) and funding my retirement account (32 years until I plan on retiring).
Determine your risk tolerance
Depending on the goals that you set for yourself, they will all come with a different risk tolerance. If you are looking to do something in the near term such as buying a home or a car then you are going to be less willing to stomach large swings in your portfolio. If you are funding your retirement, which might not be for 25 years or more, then it’s okay to take on a little extra risk.
Before investing a lot of people don’t sit down and assess their own situation. They jump right in because they want to see big returns. If you woke up tomorrow and heard the market was down 6 percent would it scare you? Would you rush to the computer to pull out your money before it went down even further? If you would then you should be a little more conservative with your investments.
Invest in mutual funds
If you are new to investing then the easiest thing to do is to purchase mutual funds through a reputable fund family. Two of my favorites are T Rowe Price and Vanguard. When looking at mutual funds there are three major things that you need to look at.
1. Expense ratio – Expense ratio is how much the fund managers will take each year to cover their fees. One great thing about a lot of Vanguard funds is that they have very low expense ratios. That means more of the profits will stay in your pocket.
2. Historical Returns – Would you rather invest in a fund that has returned 10% annually over the past five years or one that has a loss over the same period of time? Pretty obvious answer, but this is something that you need to look at. If the funds performance is lagging other similar funds then it might not be the best choice.
3. Fund Manager – When I invest in mutual funds I typically look for funds that have long-standing fund managers. If they have been running the fund for at least three years and have a strong history of returns then it’s worth considering.
Wrapping it up
Investing in the stock market doesn’t need to be scary. If you have a plan in place and understand how much risk you are willing to take then you are two steps ahead of most new investors. Finding quality investments is then all about finding a quality mutual fund manager.
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