Getting started in the stock market
If you’re new to the stock market, you may be wondering if now is the right time to start investing. The short answer is – that depends on you. Here are some points to consider before you make up your mind.
Can you afford to be in it for the long haul?
This is an important question at the best of times and right now it’s crucial. COVID19 is still very much an economic force, Brexit is on the way and the outcome of the U.S. election could have massive implications for the global economy. It’s therefore probably safe to assume that there’s going to be at least some stock-market turbulence over the short-term. In fact, the turbulence may stretch out into the medium-term before eventually settling down again.
You need to be very aware of the fact that the companies in which you invest could end up collapsing. This could, potentially, leave you with nothing. You could definitely see the value of your investments plunge from time to time, leaving you effectively unable to cash in on your investments. This means that if you think there’s a realistic chance you’re going to need access to your investment funds for other purposes, then you might want to give the stock market a pass – for now.
What are your other options?
If you want to retain your current financial value, then you must grow your wealth in line with inflation. If you want to increase your financial value, then you need to grow your wealth by more than inflation. If you fail to do either, then, over time, you will become poorer as inflation eats away at your financial worth.
The stock market has clear risks, but it also has the potential for inflation-busting gains. In fact, you could say that your potential downside is limited to your investment capital, but your potential upside is infinite. Cash deposits and other forms of investment may seem “safer” in the sense that there is much less chance that you will lose all your capital at once. The question is whether or not you can gain enough of a return to keep pace with inflation, let alone beat it.
Have you considered the issue of diversification?
It’s important to understand the principle of diversification before you start investing. For practical purposes, it means spreading your risk in a way which works for you. By all means, look at what other people do for information, guidance and inspiration. Just remember to adapt them as necessary for your individual situation.
The basic idea behind diversification is that you create an investment portfolio which has an effective balance of breadth and depth. The breadth stops you from being blindsided by the failure of one specific investment (or investment sector). The depth allows you to make meaningful returns on the investments which do perform well.
Are you prepared for platform fees, management fees and taxes?
When considering the potential return on any investment, remember to look at the net return. In other words, remember to take platform fees, management fees and taxes into consideration. Sometimes you can take steps to minimize these. For example, if a platform charges fees on a per-transaction basis, then do what you can to limit the number of transactions you make. Similarly, look at when you time your transactions to see how to make the best use of any tax-free allocations.
When it comes to management fees, the simple rule of thumb is to make sure that they are justified by the performance of the manager. That can only be judged on an individual basis.
Do you know your exit strategy?
Last but not least, before you make your way into any investment, make sure you have a clear plan for exiting it if you need or want to do so.
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