Did you catch it? Did you get to ride this week’s stock market upswing? On Tuesday (May 7), the Dow Jones Industrial Average closed over 15,000 points for the first time in its history. If you are new to the topic of investing and the stock market is as foreign to you as a farmers market, don’t worry. I will try to give you the basics.
The Dow Jones is simply an index that shows how 30 large publicly owned companies based in the United States have traded during a standard trading session in the stock market. In combination with other indices it gives us one perspective on the health of the national economy.
It was a big celebration day for Wall Street (commemorative caps were even made) and rightly so. I do believe that a key component of your financial plan should be investing for the future and I believe the stock market is still good place to invest for retirement and for wealth building. Whether you are new to investing or a seasoned pro, I want you to be ready to make the most of it.
The best way to catch the stock market upswings is to find your balance, learn about investing, pick an investment strategy, and staying consistent with your investing.
1. Find Your Balance
The stock market consistently has ups and downs (you might remember that the Dow Jones got as low as 6,000 points during the 2008 recession). It changes constantly so it reminds of those massive waves that surfers try to negotiate on a regular basis. Now, I don’t surf but I have observed that one of the keys for negotiating the waves is to find a balanced position.
How do you find that balanced position with your finances? There are some foundational steps you need to complete before you start diving into investing:
- Get control of your money via a monthly budget.
- Pay off your consumer debt (everything but the mortgage).
- Save 3-6 months of expenses in an emergency fund.
If you complete those 3 steps above you will be on a firm foundation with your money. You need to invest from a position of strength and not a position of weakness. Build a firm foundation and never, never borrow money to invest.
2. Learn about Investing
As I watch surfers, I don’t think they began by simply jumping in the water and braving the waves. That would be a sure way to get hurt. You need to understand terms, techniques and you need to practice. Most likely you will need a coach to guide you through the learning.
When you are ready to begin investing, learn all you can. You need good information: What’s a stock? What’s a dividend? How do I get into mutual funds? Are bonds or stocks better in the long run? Is it all right to invest in single stocks?
Find someone who is already investing and doing well and ask questions. You can also find a financial planner that is not simply interested in selling but is interested in teaching and helping you to reach your goals. Read about investing via books or good press/blog articles. The more you learn, the more comfortable you will be with investing.
3. Pick an Investment Strategy
Now we are really talking about the core issue. What is it that you are trying to do? I bet if you ask one of those surfers, their strategy for riding the waves is not very complicated because they need to act and react very quickly. Similarly, just like with anything around finances simple and basic is the way to go. You need to make sure you understand it and that you can explain it to someone else.
For example, my investing strategy is simple. In both my 401K and Roth IRA I am investing solely in 4 kinds of Stock Mutual Funds with a long track record (of at least 10 years). A mutual fund is an investment where thousands of people combine their money to purchase a wide diversity of stocks, bonds or other types of investments. The mutual funds are limited to the type of investment shown in their prospectus.
I am avoiding investing in single stocks and I am not investing in any bonds funds. My wife also has an IRA and a Roth IRA and we are applying the same approach to those accounts. This has been my strategy for the last 7 years and I am sticking with it. I have seen good results so I know this can work.
4. Stay Consistent with Your Investing
Did you know that for those surfers to ride the waves, they need to actually be in the water? Sounds silly, right? Investing works the same way. You have to stay in the market and not panic every time it goes down; or get super excited and alter your investment strategy the next time it goes up. If you stay in the market, you will catch the upswing of the market every time!
The market will change. I got a little worried when the Dow Jones hit 6,000 points in 2008 but I stayed the course and I have reaped the benefits. I have also learned to ride the lows. You have to think long term if you are going to invest. If you need the money within 5 years (car replacement, down payment on a home) you are better off saving it into a money market savings account where it will be safe. If you have more time (like for retirement, college, wealth building), then invest the money and leave it alone. Be consistent!
What’s your investment strategy? Leave me a comment and let me know!