Ever since the inception of the stock market, some people have always had this doubt. To invest or not, followed by another doubt – invest now or later?
Answer to both the questions is yes, you should be investing in the stock market now. Looking back at market history, the best time to invest has always been yesterday! If yesterday was missed, invest today!
“IT’S TIME IN THE MARKET, NOT TIMING THE MARKET, THAT WORKS.” – David Bach
Why should you invest in the stock market?
To beat inflation and grow wealth over long term.
Stock market and, to some extent real estate has been one of the few instruments that have consistently beaten inflation and created wealth.
Is investing in the stock market a bad idea?
It would be a bad idea if your time horizon is short i.e less than 5 years.
Stock market has its own momentum and it takes time for your invested money to bear fruit. Expecting returns immediately after investing is a bad idea.
Do not invest in the stock market if:
If you are dependent on the returns to take care of your bills and monthly expenses.
Do not expect guaranteed income from the stock market.
Successful investing requires focus and emotion free approach. Stock prices fluctuate often in the short run and are not suitable for the faint hearted.
Your stock market investments can stay stagnant for many years before taking off. This can test the patience of many investors.
Invest in the stock market or real estate?
While there may be arguments on both sides to which is better, Stock market wins purely based on the amount required to get started.
Real estate is easier as compared to stock market. It is a tangible form of investment – you own a piece of land. Has historically served as a hedge against inflation.
On the down side, investment in real estate requires large capital. There is no guarantee of an increase in real estate value. And you may not get to sell it right away when you need it.
If you think real estate market will never crash – don’t forget what happened in 2008.
Stock market investing has historically shown to be a consistent wealth creator. Requires very little amount to get started and you can liquidate your holdings in a jiffy. You get to own part of the company your bought shares of.
This section is not intended to make you pick one of the above two. Instead, look for a middle path.
If you must have real estate or are inclined to own a house – consider house hacking.
For all other purposes, consider stock market investing.
Invest in the stock market or pay off mortgage?
Depends on the returns you can generate from the stock market. I’d personally pay off mortgage simply to reduce my debt.
Since you already know what rate of interest is charged on your mortgage, you need to decide if you will be able to generate higher or similar returns from the market?
If not, it is wise to pay off mortgage and then invest. Some experts advise a 25-30 % rule between investing and paying off debt. I disagree. I would incline towards 80% mortgage pay off and 20% investing out of your total surplus funds.
Things to know before investing in the stock market
Returns are not guaranteed. You can get negative returns.
It can take years for your investments to grow.
Stock market returns are affected by the fees you end up paying. No matter how much returns you make, you need to consider the cost/fees charged to you on your investments. A .05% reduction in fees alone can have a big impact on your returns in the long run.
What/where to invest in the stock market?
There is no one size fits all formula when it comes to where to invest in the markets.
There are multiple instruments available in the stock market with multiple players present.
The choice of what instruments to select depends on your type and preference.
If you are an active investor who can allocate a few hours each week to look over investments – choices become available. Can even try day trading.
But, if you are busy executive/business person with no time to look at the markets and monitor your investments – it would be better to avoid certain instruments.
Suggested instruments for Active investor:
- Mutual funds. There is a dedicated article on mutual fund for young investors here.
Suggested instruments for Busy investor:
- Mutual Funds
- Option strategies
Also, if you wish to become a day trader, check out detailed article here..
Does investing in the stock market work?
Yes. Historically proven that the returns since the inception of the stock market until last year has been an average of 10%
Can you get rich by investing in the stock market?
Yes and no depending on the time you are invested in.
Disadvantages of investing in the stock market.
- Time consuming
- High risk
- Risk of losing it all
Strategies for investing in the stock market
While there is no benefit in trying to time the market, you could look at dollar cost averaging as a strategy to even out your cost of purchase.
Asset allocation is also an effective strategy to book profits at regular intervals. Diversify to balance out volatility. I’d consider 10% investment in GOLD ETF, another 20% in BOND ETF. With the rest in INDEX EQUITY ETF.
Keeping it simple has its payoffs. It easier to track a handful of investments [index etfs] than 20-50 stocks.
Fees: Most investors are not aware of how fees eat into their investments. Even a .05% difference can have a big impact on long term returns.
Waiting for a stock market to correct to begin investing can cost you time and returns. check out related article here.
Alternatives to investing in the stock market
Real estate – discussed earlier. Requires heavy investment.
Commodities – may not suit all. Tracking commodities difficult and returns not certain.
Forex – forex trading is looked upon as active trading than investment instrument. Volatile and returns not guaranteed.
Crypto currencies – not preferred.
Investing in a business – risky. If the business goes bust, so does your capital. If it takes off – you make money. Can you take the risk?
Each of the above alternatives have their own merits and demerits. Each with their own set of risk and rewards. Out of all the above, stock market triumphs on multiple factors – regulated, liquid, historical returns, volatility, time and energy required.
Stock market investing is one of the best ways to create wealth over the long term. The Key here is long term.
I would personally like to manage my money rather than hand it over to a fund manager to take investing decisions on my behalf.
And contrary to what you think, investing in the stock market it is not rocket science.
Anyone with basic knowledge can take care of his or her investments and fulfill their long term goals.
If you are interested in empowering yourself further on the topics mentioned above, I recommend the following books available on amazon.
Already invested in the market? Still deciding?
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I wish you well.