Are you afraid of the stock market? If so, hopefully there is a good reason as to why you are afraid. If your reason isn’t one from experience in dealing with the market directly, then that’s a major problem. Many people have professed that the stock market is a terrifying place simply because on any given day, the market could be up or down — which is defined as market volatility. Because of the constant change that plagues the market, many opt to keep their money in safe, typically, banking-related products or in a shoe box at the house. If you are you trying to make money work for you over the long-term, then the stock market is where a portion of your money needs to be.
The fear of the stock market, like anything else, stems from a lack of understanding. The first thing you need to understand is that there are two types of market cycles; bear markets and bull markets.
Bear markets: (pessimistic outlook) the stock market is declining, and we tend to see investments losing value. Investors who get into the market during this period tend to ride the investment down and then sell out after significant losses, which locks in their losses.
Bull market: (optimistic outlook) the stock market is trending upward, and we see investment gains. Investors see bigger returns, which prompts them to take a more aggressive approach than what they’re comfortable doing. Many times, people get into an investment after the biggest gains have been made and the actual return to the investor may be much smaller than the investment reports.
Typically, investors will shift between being bearish/bullish on the stock market based off factors such as: global economic concerns, national economic data and corporate financial performance.
Knowing the cycles of the market is helpful, but now you’re probably thinking about one or both questions; When is a good time to get in the market? When is a good time to get out? This would be classified as “market timing”; you’re trying to buy precisely when stocks are at their lowest and sell when they’re at their peak. Historically speaking, the stock market’s best performances (in any given year) come on a handful of days. No investment professional has a crystal ball allowing them to see into the future, so your best bet is to avoid market timing at all cost. Of course, you may run into investment people who claim they can time the market, but keep in mind, it’s not sustainable over the long-term.
Here are a few tricks to the investing game that will help you deal with the volatility of the stock market:
- Get invested and stay invested. Don’t let short-term market fluctuations drive your long-term strategy. As a reminder, you should be investing for the long-term and not trying to “time” the market
- Consider asset allocation; this is an investment strategy that involves spreading your money across the major investment types, like stocks (equities), bonds (fixed income), cash and equivalents
- Utilize dollar-cost averaging; this strategy involves investing the same amount of money into your investment, regardless if the market is up or down. This allows you to buy more shares when prices are lower and fewer when prices are high. Over time, this results in you lowering the average cost of your shares
- Re-evaluate your attitude toward risk; it’s important to do this as you go through the various stages in your life
Hopefully this will help rid you of some of that fear about the stock market. Also, there are PLENTY of financial services professionals who can assist you with determining the best investment approach for your situation. And if you opt not to work with a professional, there are countless resources for the do-it-yourself investor.
Wishing you all the best my fellow investor!