If there was ever one thing that invokes gut wrenching emotions more than any other, it is the stock market. When the stock market is mentioned, most people envision crashing fortunes and infinite despair. They relay their thoughts to the news or the latest Hollywood production that depicts stock traders losing it all and going broke.
While it is true that the above is a possible scenario, it is not the rule. At least it doesn’t have to be that way.
Of all of the wealth building tools in the world, the stock market is proven hands down to be one of the finest and can be fine tuned for wealth accumulation or wealth preservation, depending on your age and your financial goals.
When many think of the stock market, and buying stocks, they think only of the face value at the current time of the little pieces of paper that they bought and track them on their online brokerage account. What they fail to realize is that they are not just buying little slips of paper with numbers on them, but they are buying, or investing rather, in tiny pieces of businesses. When businesses go public, they slice the business into little pieces called shares. Investors buy those shares for the market price and the shareholders collect a dividend. You can get a nice little check from the company quarterly, or you can re-invest the dividend to build a bigger slice of the pie for yourself.
The problem that most people get into is that they try to buy individual stocks. If they just go out and buy the hot stock of the moment without doing the proper research, the company can go bankrupt and the shareholders can be left holding the bag. One needs to look no further than the tech and day trading explosion of the late 90’s, to see how that turned out.
Picking individual stocks can be lucrative and I would suggest dipping your toe into it wit ha small percentage of your money only if you are willing to do the research on a company and not just buy because your cousin’s best friend’s stock broker thought it was a good idea. What kind of research is necessary in picking stocks? Reading quarterly reports, listening to conference calls, determining the P/E (price to earnings) ratio, and reading financial statements. If you have time and money to burn and this is your idea of a good time, be my guest.
However, I have a better, much more convenient solution to the stock picking problem. It is my personal choice, involves little effort on your part and gives you dividends much like your stock picks, without worries of a company going bankrupt.
It is often said that it is not possible to beat the market. Surely, some fund managers can beat the market for a short time, but in the end, they fall short. The solution to this is not to beat the index, but to match the index with index funds.
An index fund, such as the S&P 500 tracks the top businesses in whatever sector each fund is designed to track. The S&P 500 tracks the top 500 publicly traded US companies. There are others that track foreign markets, and funds that cover bonds and real estate, but for now we’ll stick with stocks.
When you pick an individual company to invest in, the company could go broke or underperform the market. An index fund is self cleansing. Most index funds are what are called market cap weighted, which means that a company does not have to seriously underperform to get pushed out of the index. It only has to be valued below the market cap. When a company does not meet the cap, it gets kicked from the fund and replaced by a new company. This ensures that the best of the best stay in the fund.
By now your’e probably thinking “What if the entire index falls?” This is entirely possible when the economy is in a downturn and stock prices drop across the board. The bad news is that the market can, and will fluctuate. The good news is that the market always goes up. Not in a straight line, but gradually going up over the course of time.
When the market falls and stock prices drop across the board, most people pull out their money because they are losing money according to their brokerage account, but they haven’t actually lost much of anything. They still own the same amount of shares, even if the share price has dropped. This is actually a good time to buy more shares if you have money on the sidelines. Everyone loves a discount sale, right? The bright side is that the market will eventually recover and the general trend is upward. If the market flatlines and never recovers, that means the entire economy is gone and all that money would be useless to you anyway.
So stop being afraid of the stock market, and don’t try to pick individual companies. Stick with index funds and ride out the storms.
Rise up and Stay Strong!!