If you’re thinking of investing some of your hard-earned money in the stock market, you might be feeling a little nervous. And you’re not alone. According to a 2016 Gallup poll, only about half of Americans currently have money in the market — that’s the lowest rate in 19 years.
Luckily, you don’t have to possess Warren Buffett-level financial savvy to be a great investor. You just have to follow a few expert tips. Here are five secrets to help new investors improve their portfolios.
1. Stop Looking at Your Investments
Most people look at their stock investments much too often. Always remember that more information is not necessarily better information.
In fact, the more often you check your stocks or ETFs in your investment portfolio, the more likely you are to trade. Moreover, frequent trading has been shown to lower investment returns. This activity can be particularly damaging to your long-term financial goals.
Daily stock market price gyrations are more frequently than not just noise. Choose investments wisely and hold for the long term. When it comes to the market, benign neglect is your friend.
2. Control Your Emotions
By far, the greatest threat to your stock investments is yourself. Allowing your emotions to get in the way of rational thinking is the quickest way to do permanent damage to your financial future.
The stock market will be volatile. Additionally, talking heads on financial television will play up any volatility to create drama and improve their viewer ratings.
Allowing stock price movements or TV commentators to rattle your emotions can cause you to panic and sell your investments at the worst possible time. When the stock market drops, it is the best time to find some great companies selling at bargain prices. It is also not the time to be selling the stocks of businesses that have already seen a drop in market prices.
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3. Stop Trying to Time the Market
Constantly trying to jump in and out of the stock market is a recipe for disaster.
In order to time the market, you would need to make not one, but two, correct guesses about an uncertain future. You would have to get out of the stock market when prices are at their highest and then also get back into the stock market when prices are at their lowest. If you were to look at a stock market chart for the last several years, you might be led to believe that timing the stock market is easy, but as Warren Buffett has famously quipped, “The rearview mirror is always clearer than the windshield.”
For a long-term investor, it is far better to leave a sound investment alone and allow it to compound over the years.
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4. Invest for the Long Term
In the short term, you are never going to beat a computer trading on the stock market. The buying and selling of securities using high-speed computer servers, often set up with the fastest fiber optic lines in the same building as the stock exchanges, is now measured in picoseconds.
A picosecond is one trillionth of a second. Let that sink in for a moment. There is no way that you are going to beat computer systems that have to be measured at those speeds. The good thing is, you don’t have to. Your greatest advantage over the machines is patience and a long-term investment horizon. It is far better to invest in a good company, preferably one that is unlikely to be disrupted, and hold it for decades. An ETF or index fund tracking the stock market as a whole could also serve that purpose. Additionally, you can check out some of the best apps for new investors.
Although there are no guarantees about the future, over the last hundred years, U.S. stock market prices as a whole have continued to climb. Sure, there have been short periods of dramatic decline, but over the long term, if you had continued to hold — or even better, bought more stocks — during downturns, you would have done very well in the end.
5. Keep Costs Low
It doesn’t matter if you invest in stocks or index funds. It is always important to keep costs low.
The more active you are in the stock market, the more money you are putting in someone else’s pocket. The repeated buying and selling of stocks increases losses from fees, commissions, the bid/ask spread and taxes.
Brokerages, exchanges and even Uncle Sam are more than happy to encourage you to trade more often. They stand to benefit if you actively buy and sell stocks. You, on the other hand, benefit from keeping as much of your money as you can, for as long as you can. By avoiding expensive financial products and refraining from stock market activity by holding for the long term, you will keep more of your money in the long run.
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