By Zandile Chiwanza via Best Health
ILLUSTRATION BY SALINI PERERA
Anyone else currently have a severe case of FOMO when it comes to investing in the stock market? From the GameStop frenzy to folks on the Internet encouraging everyone to “buy the dip,” it seems like now—right now!—is the best time to invest. But while some experts might say the process is as simple as calling your bank to open an investment account or signing up for a robo-advisor, I’ve found there are several steps you might want to take before you dip a toe into the stock market.
“There’s a checklist you need to create and run through before you start investing,” says Saijal Patel, founder and CEO of Saij Elle, a financial wellness consulting firm. “So many people look to their friends or other family members for tips and investment advice. But how you create your investment portfolio has to make sense for you.”
In other words, just because the stock market is on sale doesn’t mean it’s a good time to invest. Rather than wondering if it’s the exact right moment to enter the market, consider whether you are in the best place financially and mentally to do so.
Set your goals
“Ask yourself why you are investing in the first place,” suggests Patel. “Then you can allocate a dollar amount to each target and establish a timeline to achieve your objectives.” If you have long-term goals like retirement, you’re not going to need to access that money for a while—in which case, it doesn’t make sense to leave it in the bank earning very little interest. If you can afford not to touch the cash, you can invest it and better ride out the stock market’s ups and downs. But if you might need the money in a year or two, Patel warns, “the market could crash, and then you’re pulling it out at a loss.”
Most experts recommend having at least three to six months’ living expenses saved in an emergency fund before you invest. They also suggest paying down high-interest debts first. But there’s no golden rule on this so that doesn’t mean you have to wait until you’re debt-free to start investing.
Identify your risk tolerance
Almost every investment entails some level of risk—the degree of uncertainty about how much money you’ll make or lose. The greater the potential return, the greater the risk. And your tolerance for that risk will be influenced by your age, income, investment goals and level of comfort. (Ask yourself: What would I do if the value of my investments declined? How would I feel?)
There’s no way to eliminate risk entirely when investing in stocks. To handle risk, you need to embrace the fact that the market will go up and down, put a plan in place that aligns with your tolerance and goals, and nurture the habit of investing.
Start small (really!)
A common misconception about investing is that you need to be making six figures to start. In fact, the earlier in life you begin, the more time you have to take advantage of compounding—the process of money multiplying itself, which is how investors earn interest on their interest. “That’s actually going to create wealth far more than what you invest,” says Patel.
There’s also a myth out there that the stock market is scary. I get where that comes from. There are no guarantees, and the market can (and will!) crash again. But the good news is that you don’t have to take excessive risks. You can choose from different investment products that vary on the risk spectrum: mutual funds, guaranteed investment certificates (GICs), government bonds and equities, to name a few. Diversifying your portfolio can be far more helpful than focusing on what you are investing in.
Learn what you can
“Nobody can predict what’s going to happen in the market because there are so many factors you have to consider,” Patel says. “You can look at a company and say the fundamentals are great, but then something happens, like a pandemic or geopolitical risk, that throws everything out.” That’s why she emphasizes that investment is a long-term game. And even if there are no sure things when it comes to investing, there are lots of ways to learn more: Watch YouTube, listen to podcasts, join free online communities or pay for a course.
We all have to start somewhere (including me), so the only way to gain confidence is to take control and educate yourself. If you’re still on the fence about investing in the stock market, investigate why you might be feeling that way and then seek advice from a source you trust.