Are you afraid of the stock market? If so, hopefully, there is a good reason as to why you are scared. If your reason isn’t one from experience in dealing with the market directly, then that’s a significant problem. Many people have professed that the stock market is a terrifying place simply because the market could be up or down on any given day, which is defined as market volatility. Because of the constant change that plagues the market, many opt to keep money safe, typically in banking-related products or a shoebox at the house. If you are 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, locking in their losses.
Bull market: (optimistic outlook) the stock market is trending upward, and we see investment gains. Investors see more significant returns, which prompts them to take a more aggressive approach than they’re comfortable doing. People often 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 on factors such as global economic concerns, national economic data, and corporate financial performance.
Knowing the market cycles 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 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 costs. 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 invest in the long-term and not try 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 of 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 help you determine 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.
I wish you all the best, my fellow investor!