While there is money that can be made from playing the stock market, this type of investment is not without risk. There are some questions you should ask yourself before you go ahead and start purchasing shares of stocks.
These questions will help you assess your financial situation and make sure you have a return on your investment.
1. Am I confident I should be placing my money in this versus other goals?
This is not a trick question – your answer might be a simple yes, particularly if you’ve comfortably budgeted money towards investing. After all, learning the ins & outs of investing in stocks might be a goal of yours, and so it makes sense for you to spend your money toward this end.
However, this is worth a second thought in situations like if you are carrying high-interest debt or if you don’t have a comfortable emergency fund in place. You want to make sure you are not losing money by the very act of investing, and that you are not spending vital financial resources that you could not afford to lose if the stocks you buy end up tanking.
2. Am I willing to ride out my stocks’ performance over the course of a few years?
Experts warn that the stock market is overall not the best choice for short-term investing. You want to be comfortable keeping your money in there on the scale of five to ten years. Sure, you can enjoy flexibility in when you buy or sell, but you want to enter in a mindset comfortable with a longer-term play. Five to ten years is often considered to be a comfortable range for riding out any economic downturns.
3. What are my expectations around how my stocks will perform?
Take a step back even further: by how much do you expect your stocks to increase in value before you are ready to sell? For the stock market, a reasonable overall annual return is somewhere around ten percent. Along the way, you may see ghastly crashes or rapid ascents of thirty percent or more. Be ready to ride out these waves, and resist the urge to panic sell during a market drop.
4. What role does each stock you want to buy play in your portfolio?
Diversification is a common go-to term in investing. It stems from the idea that the wider your range of investments, the less impact an individual asset’s poor performance can have on your overall portfolio. You want to balance out the risk levels of each of your assets, but you can take this a step further: diversify the industries you invest in, the sizes of each company, the number of risk factors tied to each asset, and so forth.
5. What are your criteria for selling your shares?
We’ve reviewed how you don’t want to panic sell, and you don’t want to spend your food and housing money on playing the stock market. Going in with the idea that you have the flexibility to ride out any economic downturns, what are your criteria for selling? What specific conditions need to be met in order for you to sell your shares? While you may wish to revisit these criteria over time—particularly as you learn more and become a more sophisticated, savvier investor — you want to make sure to stick to the guidelines you set for yourself.
Experts agree that being emotional or reactive about the stock market is a losing approach. Whether you ride out excitement to start buying stocks without fully thinking through whether you can afford to do this, or you panic sell when things start looking rough, emotions will guide you astray because the stock market is inherently volatile — it’s this very flexibility that helps it operate effectively.
Instead, start by asking yourself the questions we’ve laid out here. Build a deliberate, mindful approach to your stock market investing strategy, and you will be setting yourself up for a greater likelihood of positive performance.