Financial Advice
Rich Best has spent 28 years in the financial services industry, as an advisor, a managing partner, directors of training and marketing, and now as a consultant to the industry. Rich has written extensively on a broad range of personal finance topics and is published on several top financial sites. Recent books include The American Family Survival Bible and Annuity Facts Revealed: What You MUST Know Before You Invest.

Questions to Ask Yourself Before Investing in the Stock Market

Questions to Ask Yourself Before Investing in the Stock Market

These days, the stock market can seem like a scary place to put your money. But, for long-term investors, the stock market is still the best opportunity to generate real returns for meeting critical financial goals. Before starting any investment program, there are certain questions you should ask and try to drill down on the answers as much as you can.

What are my investment goals?

The most important question to consider before making any investment is, “What do I want to achieve?” The type of investments you choose will vary widely depending on your actual objective. For example, you would invest differently to save for a down payment on a house versus a long-term goal such as retirement. Without a clearly defined goal and a strategy to achieve it, you are more susceptible to the emotional whims of the market and more likely to make costly behavioral mistakes.

By establishing a clear goal and a specific timeline for achieving it, you will be better able to set realistic risk-return parameters, so you don’t have to take any more risk than is necessary to achieve your goals.

How much risk should I take?

As you consider how much risk you would be willing to take, it is essential to remember one of the most important tenets of investing, which is risk and returns are related. Without risk, there can be no returns. The greater the returns you are seeking, the more risk you should be willing to assume. In that respect, risk can be a good thing, but only if you allow for sufficient time to let the inevitable market cycles occur.

Generally, the longer your investment time horizon, the greater the amount of risk you should be willing to assume because there will be more time for the market to work through the up and down cycles. Historically, patient investors have been rewarded with positive long term returns.

How much can I afford to invest?

This is an important question because it goes to how much risk you can afford to take as you begin your investment program. Some investment experts say you shouldn’t invest any amount of money that you can’t afford to lose. That perspective might apply if you plan to buy a speculative, high-flying stock for a quick gain. However, if you’re in it for the long-term and you know what to look for when investing in stocks, the chances of losing all your money are between slim and none. While you could watch your stocks fall in value by 20% to 40% at any given time, with the right stocks, you will also watch them recover and go on to more significant gains over the long term.

The real issue is whether your initial investment amount is too small to purchase at least a handful of stocks to achieve some diversification. If not, you may want to wait until you have the funds to buy at least three to five different stocks. You may want to consider investing stock exchange-traded funds (ETFs) until you’ve accumulated enough to switch to individual stocks.

Is this a good time to invest in stocks?

Is it better to invest in the stock market when stock prices are rising or falling? Actually, neither time is necessarily better or worse if you are investing for the long-term (7 – 8 years or longer). No one knows which direction the stock market will move at any given time, but we do know that it has always moved higher over the long term. Every bear market (extended market decline) has been followed by a bull market (extended market climb), and bull markets have always lasted longer than bear markets. That means that the gains of bull markets have always been greater than the losses of bull markets.

If you’re in it for the long term, the best time to invest in stocks is now, because the earlier you start investing, the more time your money has to grow.

How do I get started?

If you have decided to invest in stocks on your own, the first step is to do your homework – lots and lots of homework. In addition to the extensive due diligence you will need to do on prospective stock picks, you should study up on the market – what makes it move, its history of cycles, the difference between growth stocks, value stocks, and small-cap stocks. It would also be helpful to study some books on time-tested investment principles and practices by investment legends such as Warren Buffett and Peter Lynch. With that foundation of knowledge, you are ready to focus on choosing the right stocks for your portfolio.

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