The first question to ask yourself before putting any money into the stock market is: Can I afford to lose this? If the answer is no, then don’t do it. Simple.
Do not invest any sum of money that if lost would materially impact the quality, or comfort, of your day-to-day life.
The second question to ask yourself is how can I reduce the likelihood of losing money? The answer to this question comes down to reducing your risk. You’ve heard the saying, “Don’t put all your eggs in one basket.” It’s entirely cliched but nevertheless true.
The basic idea is that we should never invest 100% of our savings into just one single business. Instead we should spread our investments across multiple businesses. That way the losses of any one individual investment will not materially impact our savings as a whole, and may even be be offset by the gains of another investment.
A very cheap and easy way to get started in the stock market is by investing in what are known as index funds. The S&P 500 index is a collective list of the 500 largest businesses in America as reported by a company called Standard & Poor’s, hence the name. By investing in an S&P 500 index fund you will effectively be investing your money in 500 different businesses including the likes of Apple, Amazon and Google.
We must realise that simply because we spread our investments across as many as 500 businesses does not mean we cannot lose money. To illustrate this point check out the picture below:
Do not invest any sum of money that if lost would materially impact the quality, or comfort, of your day-to-day life.
The second question to ask yourself is how can I reduce the likelihood of losing money? The answer to this question comes down to reducing your risk. You’ve heard the saying, “Don’t put all your eggs in one basket.” It’s entirely cliched but nevertheless true.
The basic idea is that we should never invest 100% of our savings into just one single business. Instead we should spread our investments across multiple businesses. That way the losses of any one individual investment will not materially impact our savings as a whole, and may even be be offset by the gains of another investment.
A very cheap and easy way to get started in the stock market is by investing in what are known as index funds. The S&P 500 index is a collective list of the 500 largest businesses in America as reported by a company called Standard & Poor’s, hence the name. By investing in an S&P 500 index fund you will effectively be investing your money in 500 different businesses including the likes of Apple, Amazon and Google.
We must realise that simply because we spread our investments across as many as 500 businesses does not mean we cannot lose money. To illustrate this point check out the picture below:
We can see that the S&P 500, whilst over the long run has provided a positive return, has experienced multiple periods of decline which could have lost investors money if they bought at highs and sold at lows. The point here is that investing is not a get rich quick scheme and requires lots of patience - at least 5 years if not more.
Investors can also use a strategy called “dollar-cost-averaging” to avoid the risk of investing at the peak of a market.
Investors can also use a strategy called “dollar-cost-averaging” to avoid the risk of investing at the peak of a market.
Of course in order to invest we must of have money in the first place. To find out how you can save more money for investing check out the next blog Prioritise Your Spending
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