When the stock market takes a dive, most investors panic. They either do one of two things. Some sell off their stock because they think they are going to lose money if they hold on to them, and some do nothing at all. Sometimes, even the so-called experts seem to panic. Let’s take a closer look at the purpose of investing in the first place.
The entire reason we invest our money in the stock market is to protect our principal, while at the same time earn a dividend on our principal investment. So if we invest $10,000.00 in stocks like PepsiCo, we expect at least a 10% yearly return. However, when the stock market starts diving down, the first thing that an investor does is panic. They are afraid of losing their principal and earning a return that is less than the rate of inflation. That’s the reason some do not like bonds. You see, when you invest in bonds, you are exposing yourself to losing your principal. How? Well, let’s take the same $10,000.00 principal investment and apply it to a bond. You take your $10,000.00 and purchase a one year bond that is yielding 0.1% and the yearly inflation rate is 2.9%. Thus, at the end of the year your investment is now worth $9,720.00 and from an investors standpoint, you lost $280.00 of your principal due to inflation.
What do we as investors do to safeguard our investments in the face of a very uncertain market? There are three things that you can do now to weather the stock market’s ups and downs. First, let’s look at what separates the investors from the speculators. An investor is someone who is looking for the long-term investment and a speculator is always looking for a short-term investment with a big payoff. When you are investing, you want to be sure you do the following three things:
Fundamental Analysis
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This is where you analyze the strength of the company that you are purchasing stock in. These are usually Blue Chip stocks, like Apple or Visa. You want to take a defensive investor approach to pick your stocks. It is not only how much risk you are willing to endure but your due diligence in choosing the right stocks. Do not fall in love with a stock so much that you buy it all up. This brings us to the next point.
Diversification
This is where the term “don’t put your eggs into one basket” comes into play. You want to make sure that your investment portfolio has stocks of varying risk, market share, price, and dividends. Your risk should be based upon your age and obligations. For example, if you are a male in his 30s who is married and has two kids, then you would want a lower risk portfolio. However, if you are a male in your 50s who is married with grown children, you would want a higher risk portfolio. Remember, your earnings in the stock market are directly related to the amount of risk that you are willing to endure. The number one question when assessing risk is how much money can you afford to lose?
Seek Steady Returns
Investing success is measured not by how much you make, but by how much you keep after inflation. With that said, you should avoid speculation. Speculation is defined as high-risk investments where you could literally lose everything, Â such as day trading and IPO (Initial Public Offerings). These stocks are often overpriced and as the company begins to grow, their earnings begin to slow down. Stock price matters. Remember the movie “Wall Street?” Always buy low and sell high.
However, I like Warren Buffet’s solution to the entire worry-free investing. He has proven that if you find a good money market fund, you can have all three steps already planned out and insulate your stock portfolio when the stock market takes a dive. A money market account has already been analyzed, diversified, and steady returns are already factored in. Besides, you should never obsess over your portfolio. Yes, spend 20 minutes a day looking over your stock market portfolio, but do not panic. You got this!
