As a general guide to investing: the stock market and investing for beginners is a bit like a riddle. All investors should understand the stock market because stock investing is the key to higher investment profits. At the same time, investing DIRECTLY in the stock market is not smart investing for beginners, because it often leads to unnecessary losses. So, here’s a basic guide to investing in stocks without playing the stock market, so you can make money and sleep at night.
No matter what anyone tells you, the stock market is not predictable over the short term. For example, not one person on the face of this earth predicted that in early May of 2010 that the U.S. stock market would fall 999 points within one trading day. Most people don’t even know what 999 points means. The good news is that you don’t need to understand the day to day rhetoric of the market to make money investing in stocks. But you should understand how the stock market works; and how investing for beginners can be simplified.
Stock prices fluctuate based on only one thing: buying and selling activity. Every second the market is open, some people are placing BUY orders and others are placing SELL orders. If these orders are in balance prices change little. If buy orders far outweigh sell orders prices soar; and if sell orders swamp buy orders prices fall like a rock. The stock market is simply an auction where buyers and sellers (buy and sell orders) are hooked up with each other. What prompts investors to buy or sell? More than anything else, the news events of the day influence investment decisions.
For example, there was bad news on debt problems in Europe the day the Dow Jones Average dropped almost 1000 points before recovering most of the loss before the market closed. Why the move was so extreme was a bit of a mystery, but one thing is for sure. Big sell orders swamped buy orders and prices took a dive. The Dow Jones Average started the day at about 10,000 (it was actually a few hundred points higher), so a 1000 point move translates to about a 10% drop in stock prices in one day. Now, let’s move on to our guide to investing for beginners.
You do not need to play the stock market game of outguessing the market on a daily basis in order to make money in stocks. The good news is that over the longer term stocks have been good long term investments, with average yearly returns of about 10% over the last 80 years or so. There have been years when the stock market and stock investors on average lost 50%, and years when it gained 50% or more; but these are the exception.
Stock investing for beginners should focus on long term investing in stock mutual funds. As a basic guide to investing… if you own stock funds, bond funds and money market funds in about equal amounts… you should do just fine over the years without wild swings in the value of your total investment portfolio.
In mutual funds professionals do the management for you. By owning all three basic fund types (stock, bond and money market funds) your overall risk is lowered. When the stock market has a bad day or year, you’ve got money in safer investments to cushion the blow. The real secret to investing for beginners is this: allocate your assets to stocks, bonds and the money market by investing in mutual funds. Decide how much (what percent) to invest in each, and keep your money invested that way. Let’s say you go with 50% in stock funds and 25% in each of the other two categories. Once a year review your results, and move money if your percentages have changed. For example, if your stock fund(s) is now only 40% of your total investment, move money from the others to bring it back to 50%… ditto to keep your other funds in line with your original allocation.
If you keep your money invested across all three asset classes (like above) the stock market and its unpredictability should no longer be a major concern.