Making money is fun. But when your investments start losing money, you may find yourself in a panic. And if your fears are great enough, you may end up selling your investments — or if you are holding cash, never putting it into the stock market.
But investing can significantly grow your accounts and help you meet your financial goals much sooner than saving alone. For these reasons, you should conquer your stock market fears.
Start by doing these four things.
1. Learn more about how the stock market works
Each year, a stock market index starts trading at a certain price and ends the year either priced the same, lower, or higher. But the road from beginning to end in investing is not linear, and you may see lots of fluctuations in between.
If you invested in large-cap stocks in 2020, you would've started the year off well, before experiencing a steep 34% drop in March, and quickly recovering your losses by ending the year with a 18.4% gain.
Stock market volatility can be nerve-wracking. But rather than being concerned with how your investments are performing day-to-day, think about the long-term.
If you bought a particular stock 10 years ago, would you have more money today? How about 20 years ago?
There are no guarantees that stocks will continue performing the way that they always have. But if the growth trend you see has been consistent over its life, you may be able to make a reasonable projection that the pattern could continue into the future.
2. Start with smaller investment amounts
If you're fearful of the stock market, dipping your toe into the world of investing may be a better option than pouring in a lump sum of money. If you make a huge investment just before a crash, you may regret your decision — or end up holding onto cash for longer than you should.
Starting with smaller amounts lets you get comfortable with the investing process, without fearing that your livelihood is at stake. And as your comfort level increases, you can start to invest more.
Investing this way not only helps you get off of the sidelines, but also lets you capture different prices no matter how the stock market performs. You'll get share value appreciation if the market goes up, but you won't be risking all of your money if it goes down.
3. Keep it simple
The thought of buying the next great company is exciting! But the responsibility that it entails shouldn't be taken lightly.
Buying stock in companies you know and love already can be a great starting place, but your research shouldn't stop there. You should also get a good understanding of how the company operates. Try to answer questions like:
How do they make money?
Do they have any new products that could change their profitability for the better?
Could they potentially become obsolete when faced with a changing world and lack of innovation?
If you don't have time to study your investments before buying them — as well as conducting ongoing research while holding them — you should consider simplifying with an index fund or ETF. When you buy these types of investments there is very little guesswork. In addition, you get a pretty close mirror of whichever holdings are in the index.
4. Diversify your holdings
The more aggressive of holdings you have, like stocks, the more they can fluctuate. And from year-to-year, even in the absence of volatility, some asset classes do better than others.
For example, in 2016, small-cap stocks gained 21.31% and large-cap stocks only gained 11.96%. If you own too much of one thing, you may end up in a situation where you're crossing your fingers and hoping for the best. But in years when your investment doesn't perform the way you're hoping for, you may find yourself frustrated.
Diversifying your portfolio can help alleviate these problems. Rather than guessing each year how your individual security will perform, you'll hold a variety of investments. This can help reduce the ups and downs in your accounts and smooth out your return over the long run.
The thought of losing money is scary. Especially if it's for something important, like retirement. But investing could be a crucial step in meeting your financial objectives. Not to mention, learning how you can control your stock market fears could potentially help you accumulate a considerable amount of wealth.
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