Investing in the stock market can be an effective way to create wealth and long-term financial security. However, putting money in the market can be unnerving for those who are just starting their investment journey. The good news is that there are ways to limit risk while still achieving consistent returns over a period of years or decades.
The most important thing that an investor needs to understand is why prices fluctuate. While this may seem like a random event, there are reasons why prices go up and down. For instance, a stock price may rise after a solid earnings report or decline if a key manager or employee decides to leave. Prices may also decline because investors are selling their shares to lock in profits.
An easy way to limit risk when investing in the stock market is to buy index funds. Index funds aim to track the general performance of the market itself. Historically, the S&P 500 has offered 11 percent annual returns even after factoring in recessions and the Great Depression. Therefore, an investor can generally buy shares in the fund and let it grow over the years without worrying too much about daily, weekly or monthly performance.
As a general rule, a highly diversified portfolio will see higher gains over several years compared to those that are highly concentrated in one area. This is because not all sectors of the economy rise and fall at the same time. By having exposure to both blue chip companies and emerging businesses, you can get a mix of safety and growth that can lead to consistent returns. Diversified portfolios will often keep pace with or outperform the market in both good and bad economic conditions.
Working with a company such as White Gull Financial can make it easy to create a portfolio that you feel comfortable with. A financial adviser can work with you to assess your goals and your risk tolerance to determine the right mix of stocks to invest in. For instance, those who value dividends over appreciation may want to buy stocks in companies like Coke or Unilever.
Those who value appreciation over dividends may want to choose to invest in companies like Apple, Amazon or Alphabet. A financial planner may also teach you about concepts such as dollar-cost averaging. This involves an investor buying stocks as prices fall to lower your average cost per share. When the price of the stock rises above the average cost per share, an individual will have made a net profit on the investment.
Buying stocks may seem scary to those who have little experience in the market. In some cases, investor fears are stoked by those in the media who want to publicize every market dip as a sign of the next recession. However, over time, you will learn that there are opportunities to make money in both up and down markets, which may help you start to invest with purpose and confidence.