Stocks are notching higher highs, but a lot of would-be investors are still on the sidelines.
Some have been scared of the market forever. Some have been scared since 2008. And some have been scared of getting back in since the election of Donald Trump.
Scared investors who avoid the markets during uncertain times think they’re making the smart play. But being scared doesn’t make you money, it costs you money. Over your lifetime, it will cost you a lot of money.
Here are the reasons why you shouldn’t be scared, how to successfully invest, and how to play the market right now…
The Two Rules for Successful Investing
Investing is easy because it’s personal. It’s all about you. Who knows you better than you do?
You can become a highly confident and successful investor if you just trust yourself.
When it comes to advice from anyone else, there’s a lot of really good counsel out there… but there’s also a lot of really bad brokers out there dealing in self-serving advice.
There are, of course, good brokers and good registered investment advisors, and there is a huge difference between those two. I’ll help you to understand the difference next week (and it may shock you).
But, in the end, it’s you.
Being a confident and successful investor boils down to two things:
- Invest in what you understand, and…
- Don’t be afraid to make small mistakes.
Yes, mistakes mean maybe losing some of the time.
To my first point: invest in what you know. If you know cars, think about buying shares in car companies, parts companies, or a company in an industry that serves the automobile industry.
If you like beauty, fashion, or shopping, invest in the cosmetics industry, the clothing industry, or other retail companies.
Essentially, if you buy shares in companies whose business you understand, you’ll watch the stocks you’re invested in.
And that’s critical. Investors lose money because they lose sight of the stocks they’re invested in. They don’t follow them. That’s no one’s fault but their own.
If it’s your money, no one is more responsible for your money, future, or potential to become wealthy than you. It’s your job to make money in the market. Learn to love your work.
To my second point: if you’ve been scared, get over it. You’re in charge and you’re going to be a smart, successful investor.
You get over the scared part of investing by simply accepting that the market can be a strange beast. Stocks don’t always do what you expect them to do.
Successful investing is all about learning from your winners and losers. But, let’s face it, it’s losing that hurts and scares us.
Everyone loses sometimes. The trick to learning from this is to lose small and figure out what just happened that cost you some money. That goes back to knowing the companies you’re invested in, knowing what’s going on with them, and figuring out why the stock you own just did what it did.
Google the company and ask questions like, “Why did XYZ stock drop today/yesterday?” and put in the date. Sometimes there will be articles about your company that explain what happened.
You should read as much as you can about the stocks you own. Understanding what analysts or journalists are saying about what you’re invested in helps you understand what others are thinking. Then you get to decide whether or not you agree with them.
Once you buy a stock, you need to figure out what you’re going to do with it if it goes down.
Sometimes the stock will drop because of bad earnings, or some other company-specific news. And sometimes your stocks will go down no matter how healthy the company is simply because the rest of the market is going down.
That’s where portfolio management comes in. There’s a lot to learn about how to manage your portfolio, but you start the same way – by learning how to manage one or two stocks.
What to Do If Your Stock Falls
There are three things to think about if your stock goes down, and what you do depends on why it happened.
- You could sell the stock.
- You could hold on to it.
- You could buy more of it at a lower price.
Always have a “get-out level.” Make that get-out price a small amount, maybe 10%-15% below where you got in. If you get out there, you have a small loss and can reassess what happened.
If you hold onto a stock as it goes down, the negative is that it’s painful to watch yourself losing money.
The other side of that is called “buy and hold.” That means you buy and hold the stock no matter what happens, under the theory that stocks eventually rise again. That’s just not the case.
So, if you’re a beginner, I don’t recommend you buy and hold. If you do and you are losing money, it paralyzes you, it makes you scared to make decisions. You never, ever want to be scared. You’re better off taking that small loss and learning from it.
As far as buying more stock when it goes down, leave that to the pros. You will eventually become one, so you can think about averaging down when you’re up for it.
When your stock goes up, it’s fun. You’re making money, which is addicting.
As long as your stock keeps going up, keep enjoying the ride. While you are watching the company and the stock, if you see reasons to sell the stock, sell it. It never hurts to make a profit.
Use What You Know ASAP
Now, let’s talk about where the market is now and what you should do if you’re on the sidelines.
Get in. The water’s warm.
Sure, you might be scared because the White House is being run by newbies who are shaking a lot of trees here and across the globe.
But you’re not investing in the White House. You’re investing in the stock market.
So what if the White House looks topsy-turvy? It always looks that way to someone.
Look at the stock market – what’s it telling us? It’s gone a lot higher since Donald Trump’s election.
It’s saying it thinks the future will be more business friendly. It’s saying there’s money to be made if the economy starts growing again. It’s optimistic.
Does the market know what the future holds? Sometimes it does. At least, it’s right until it changes its mind. Then it’s right about going down. The market’s rarely wrong – it just reflects what the majority of investors believe the future holds.
I’m bullish for a lot of reasons, which I’ve written about here.
There’s more capital than ever before chasing fewer and fewer listed companies across U.S. and global markets, which means stock prices will go up.
The market has gone up since 2009, amidst a lot of scary moments. The idea that it would suddenly go down now, right as a business-friendly president and administration is taking over, just doesn’t make sense.
The promises of Trumponomics (tax cuts, stimulus, and deregulation) are all bullish for stocks.
Are there boogeymen out there capable of stabbing the markets? Yes, there are. There always are.
But if you’re using them as an excuse to avoid the markets, you’re just running scared. And being scared doesn’t make you money.
I’ll tell you when I see those boogeymen raising their knives and axes, and we’ll get out of the way.
Until then, you’ve got to be in it to win it.