Last updated on July 24th, 2022 at 05:23 am
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Stock investing can be one of the most fruitful ways to make money…or it can be a disaster. With that said, is getting into stocks worth it?
Investing in stocks is good if you have a long term outlook (many years or even decades). If you only have that money for a few weeks, or months before you will need it then you shouldn’t invest it in stocks.
If you’re looking for long-term investments that can help you save for retirement, stocks will be ideal for you. However if you will need the money for a car payment, tuition, or anything else in a short period of time then you shouldn’t put it in stocks.
The stock market is volatile, almost everyone knows that. But, if you have time on your side you can ride out that volatility over time and bolster your retirement account substantially.
I’m going to try to help you get there by shedding some light on stock investing.
Is Getting Into Stocks Worth it?
Stocks represent tiny pieces of ownership in a company. So when you buy a company’s stock, you’re essentially becoming a part-owner (or “stockholder”) of that company.
The price of a stock is driven by the performance of that company and of the economy as a whole. So if you own stock in a company that is doing well, the value of your stock will go up.
That’s great! But on the other hand, if a company is struggling or the economy is going through a downturn, that stock’s value might go down.
With stocks, you make money one of two ways: when you sell your stock or you receive a dividend from the company (that’s a regular payment that’s basically the company’s way of saying “thank you” for being a stockholder).
So, should you buy stocks? Yes, stocks should definitely be part of your portfolio . . . but you need to be smart about how your stocks are grouped and diversified.
Historically, the stock market’s average annual return is somewhere between 10–12% but that’s over a long period. Single years can be up or down massive amounts.
This is why you should only buy stocks with money that you don’t need for many years.
However, this returns means that if you invest in stocks in the right way, you’ll be able to grow your retirement savings in a way that beats inflation and sets you up for the kind of retirement you’ve always wanted.
But if you’re not careful, you could be betting your retirement future on the success of just a handful of companies, and that usually doesn’t end well.
How Should You Approach Stocks?
While investing in stocks always has some element of risk involved, there are ways you can reduce your risk—and one of the main ones is through diversification.
That’s just a fancy investing term for spreading your investments around so that you’re not putting all of your eggs in one basket.
There are basically three different ways you can buy stocks, either through:
- Single stocks
- Exchange-traded funds (ETFs)
- Mutual funds
Which option will help you diversify your portfolio enough to reduce your investment risk while still enjoying the growth potential that stocks offer? Let’s go through each option one at a time
Option #1: Single Stocks
When you buy single stocks, you’re basically betting on the performance of one company. Most people who dabble with buying and selling stocks try to “time the market.”
They’ll buy a stock when they believe its value is low and then plan to sell after its value rises in order to make a profit.
Instead of taking a “buy and hold” approach to investing—which means you hold on to your stocks for longer periods of time regardless of what the stock market is doing—most stock traders will try to sell their stocks after just a few days or weeks to make a quick profit.
Option #2: Exchange-Traded Funds (ETFs)
ETFs are basically a cross between mutual funds and stocks.
They are funds that contain stocks from different companies, but they are traded like single stocks on a stock market exchange.
They normally try to match the returns of a market index like the Dow Jones Industrial Average or the S&P 500 by investing in the stocks that are included in that index.
In other words, an ETF’s performance will normally match the performance of a specific portion of the stock market.
Option #3: Mutual Funds
Mutual funds are created when a group of investors pools their money together and buy stocks from dozens of different companies, which gives you a nice level of diversification for your portfolio.
Mutual funds are also actively managed funds, which means a group of investing professionals makes it their mission to pick and choose stocks for the fund with the goal of beating the stock market’s average returns.
Which Investment Option Is The Best?
Of the three options mentioned above, only you can truly decide what is best for you. However I will tell you what I personally do with my portfolio.
Personally I have a small portion of my stock portfolio in individual stocks (under 5%). The rest I have invested through a variety of mutual funds and ETFs that track different segments of the market.
I have my ETFs split up among large cap, mid cap, small cap, and REIT ETFs so my exposure is relatively balanced.
For me this is the best option but you might prefer more risk (more individual stocks) or less risk (no individual stocks).
Ultimately you have to decide what you should do with your stock portfolio.
Is getting into stocks worth it? As I mentioned above, yes…stocks can be a great investment if you know how to invest wisely.
Thankfully, getting into stocks is fairly simple through the use of online trading platforms like Robinhood and Fidelity.
These brokers charge zero commissions on trades and charge nothing to create an account. If you’re thinking of taking the plunge when it comes to stock investing, this is where I’d start!