Stepping into the stock market for the first time can be exciting, but it also can be intimidating. What to buy, when to sell, and just how much you stand to make or lose are all questions first-time investors must consider. The good news? Investing in the stock market doesn’t have to be complicated.
7 stock market strategies for beginners
There’s no foolproof rule for investing in the stock market, of course, but there are some basic guidelines that could improve your chances of success.
1. Diversify, diversify, diversify
You’ve heard the warning not to put all your eggs in one basket, and it’s more relevant than ever when it comes to investing in the stock market. Investing all your money in one company, no matter how much you believe in it, isn’t wise. There are no sure bets, and spreading out the money you invest among various companies lowers your risk of losing big.
Robert Johnson, Ph.D., chartered financial analyst, chartered alternative investment analyst and professor of finance at Heider College of Business at Creighton University, said index funds are an easy way to diversify.
“Don’t overcomplicate investing,” Johnson said. ”For most investors, all you really need to do is invest in a diversified index mutual fund or exchange-traded fund with a low fee. It diversifies you, you’re not paying a lot in expenses, and you get a broad swath of the market. You get that diversification.”
2. Think of investing as a marathon, not a sprint
History has shown the stock market is a strong financial bet if you give it enough time. Johnson said that, on average, the stock market has gone up about 10% a year since 1926. In comparison, bonds have gone up about 6% a year. The difference between 10% and 6% compounded is huge, and the stock market is the clear winner.
You have to be patient, though, and not pull out your money at the first sign of volatility. Some years, the stock market will be down, but over several years or decades, investments in the market generally increase in value.
Johnson said too many people have a short-term perspective when it comes to the stock market. “Time in the market is more important than timing the market,” he said. “What you want is a disciplined, long-term approach.”
3. Ignore the hype
Buy! Sell! The financial media is constantly handing out advice, often sending people’s emotions rising and plummeting with the market. The key, Johnson said, is to ignore it for the most part and stay on a steady course.
He said a 500-point drop in the Dow Jones Industrial Average may sound alarming, but that’s just a little over 1% given the index fund today. By comparison, the stock market fell nearly 22% on Black Monday in October 1987. So while it seems like the market has been volatile this year, the fact is it doesn’t even rank when you look at major percentage declines historically, according to Johnson.
“People infer that there is a lot of volatility in the market when really there isn’t,” he said. “That’s the way markets work. They’re not any more volatile today than they have been historically.”
The stock market goes up and down, but in the long run, it’s one of the best ways to accumulate wealth if you don’t buy and sell based on every headline. Johnson said that one of the biggest mistakes people make is trying to time the market. They get out of the market when stocks tumble and then get back in when stocks rise. That, unfortunately, means they’re buying high and selling low, which is the opposite of what investors should do.
4. Invest easily in a retirement plan
Employer-sponsored retirement accounts, such as 401(k) plans, offer a simple way to jump into the stock market. You contribute a set amount of your paycheck to be invested in a variety of stocks and funds, where it grows tax-deferred (traditional 401(k)s) or tax-free (Roth 401(k)s) until you reach retirement. Since your contributions typically are deducted automatically from your paycheck, it’s an easy way to automate investments in the stock market without much effort on your part. If your employer offers matching contributions, that’s even better.
If you max out your 401(k) contributions or your employer doesn’t offer a plan, you also can consider opening an individual retirement account (IRA), which lets you invest money in the stock market with tax options (traditional and Roth) and benefits similar to a 401(k).
5. Make investing a regular habit
Making regular contributions to your investments is incredibly important to long-term success in the stock market, and automating those investments is one of the best ways to ensure they happen.
“What you want to do is to automate as many decisions as you can, as it then becomes a habit,” Johnson said. “It becomes a habit almost unbeknownst to you.”
Johnson explained that people’s inherent laziness can work to their advantage since they have to make an effort and take a few steps to undo the automatic investments once they’ve set them up.
Most automated investments, such as 401(k) contributions, use a dollar cost averaging strategy, which invests a set amount into the market at regular intervals (weekly, monthly, quarterly, etc.) regardless of whether the market is up, down or sideways. You basically set it and forget it. Over time, this strategy can protect you from market fluctuations, prevent you from making moves based on emotion and increase your overall return.
6. Create a plan — and then stick to it
Johnson suggested that new investors should develop an investment policy statement that includes their goals, objectives and target asset allocation. He said it should be developed when the market is relatively calm and you are clearheaded.
Then, when the market gets a bit shaky and you start to falter in your resolve to stay in the market, you can refer back to it. While you can do this on your own, you may want to consider hiring a financial planner to help with the process. They can help you come up with a plan and prevent you from making an ill-advised move.
7. Take more risk
“One of the biggest problems young people have today is that they fail to take enough financial risk,” Johnson said.
“Risk sounds like a pejorative term, but there’s a risk-return ratio in financial markets. You need to embrace the risk of the stock market to earn the long-term returns of the stock market,” Johnson said. “Over long periods of time, the stock market beats all other forms of investment pretty significantly. What many young people fail to realize is that they have the biggest factor for success [in the stock market] in their favor, and that’s time.”
If you’re looking for a guaranteed get-rich-quick solution, the stock market isn’t your answer. If, however, you’re looking for a solid long-term way to maximize your money, the stock market is an excellent option to consider.