If you think you need a robust stock market investing strategy ASAP, it’s the right way to approach your finances. Without an investment plan, you cannot catch up with inflation, maintaining your lifestyle.
In the US, the average credit debt of US citizens is $7.321. Marking more than 1.5% growth from last year! That’s what happens when you don’t have a good investment strategy to back your earnings.
However, investing may not seem an easy task on day 1. I was also confused between fixed and growth assets and lost some money in the market. I was also petrified of stock market crashes.
The bottom line is that you need to know a thing or two, before you make the first investment. Did you also know that your returns depend on the risk appetite?
Now what is the risk appetite? It is the amount of risk that you can afford to take. Now I don’t mean the risk you are willing to take. Suppose your monthly earning is $5000. You are willing to put 80% of it at stake. So your risk appetite doesn’t become 80%.
Ideally, you must spend only 15% of your disposable income on your stock market investing plan. However, the disposable amount varies from person to person.
Let’s break it down in a way that’s simple and easy to understand.
When you invest, there is a risk in it. It might be a share market crash. Or a sudden drop in value of the assets you invested in. It means you can easily lose the money you put in. At the same time, you can also make a generous profit, if your investment strategy works well.
The general rule is that higher risks earn you higher rewards. If you are willing to invest 20% instead of 15%, you will get greater returns. However I won’t suggest you do that on day 1 of your investment journey. Stock market investing is a long drawn journey.
However with time, you will get to know the nitty gritty of the investment journey. After that you can design your risk appetite accordingly. So, what do you do if you want to be conservative in the market?
You simply accept smaller rewards. That’s the sole approach you need to guard your hard earned money.
You need to look at the market often. Imagine a stock that has been performing well for the last 12 months. That doesn’t ensure it will also perform well in a streak for the next 6 months.
Check the historical patterns, the MACI matrix and risk and fear grids. If there is a big difference between the weekly high and lows on the chart, it is an indication that the price is not stable. On the flipside, it means that the price may go down any time.
However experts say we often make errors of judgement. So one year may go high. The other may bring hard luck. What’s more important is not to become intimidated by big wins or losses. Stock market investing can take such turns fast.
If I go by historical data, the stock market investing plan will go well before inflation hits. The average return was 10% and still climbing! For a better understanding of how the markets work, read this https://www.sofi.com/learn/content/average-stock-market-return/.
It’s also helpful to look at how the stock market has performed over time. Historically, the stock market has delivered around 10% annual returns before inflation, but results vary widely from year to year. Some years bring much higher gains, while others see losses. If you want a better understanding of how returns have changed over different time periods and what influences them, you can read this.
This is why it’s important to know that investing is not about making fast money. It’s about being smart and patient over the long run.
Not all risks are the same. When you invest, you face different kinds of risks. Here are a few of the most common ones:
Market Risk: the entire stock market is always under threat. It can drop anytime. Even the leading brands can sink anytime.
Inflation Risk: If the stock price keeps rising, your investment will lose its value over time. Hence you need to plan your investment well. You need to earn much so that you can overcome the depreciation that inflation does to your assets.
Liquidity Risk: often you won’t get the best price for an investment. And that might be a bit of a concern, considering you need cash right at the moment!
Interest Rate Risk: when an interest rate shuffles suddenly, your investment might suffer. This happens with bonds frequently. The bond price falls with the slightest market turbulence.
Company-Specific Risk: Often companies fall due to internal reasons. So it is crucial that you do a fundamental analysis of the company and its assets before you put your money in it.
Each type of risk affects your investments differently. Knowing about them helps you prepare and make better choices.
Risk tolerance level is determined by your fiscal parity. And your disposable income at large! Some people are comfortable seeing their investments drop by 20% in a bad year. Others lose sleep over a 5% dip.
To figure out your risk tolerance, ask yourself a few questions:
Younger investors usually have a higher risk tolerance because they have more time to recover from losses. Older investors often prefer less risk because they may need their money soon.
You can also think about different risk profiles:
If you’re not sure where you fall, it’s smart to start small. Watch how you feel when your investments go up and down. Over time, you’ll get a better sense of your comfort level.
Smart investing is all about balance. You want enough risk to earn good returns but not so much that you panic during market swings. Here are a few ways to balance risk and reward:
Diversification: Spread your money across different types of investments, like stocks, bonds, and real estate. This way, if one investment falls, others might hold steady or rise.
Time Horizon: If you have a long time before you need your money, you can take on more risk. If you need the money soon, play it safer.
Dollar-Cost Averaging: Invest a fixed amount of money at regular intervals. This helps smooth out the effects of market ups and downs over time.
Set Clear Goals: Know what you are investing for. Are you saving for retirement, a house, or something else? Your goals can guide your choices.
When you have a plan, it’s easier to stay calm even when the market moves.
Risk often sounds like a bad word. But when it comes to stock market investing, risk is not something you should fear. It’s something you should manage.
Taking on smart, calculated risk is how your money can grow. But don’t bail out risks completely. You may miss out on good earning chances. Instead keep focusing on the market. And invest carefully.
Don’t take risks blatantly. First, understand the risks you are planning to take on. Secondly, stick to a genuine investment plan. But it is more important to stick to it, when things are not going your way.
Just keep a tab on the market. And be honest to your plan. Don’t make prompt changes just because the market is slightly easier now.
When you have a grip on the market, you can expect really good returns. But the market only rewards those who stay patient and can put their emotions under leash!
Barsha Bhattacharya is a senior content writing executive. As a marketing enthusiast and professional for the past 4 years, writing is new to Barsha. And she is loving every bit of it. Her niches are marketing, lifestyle, wellness, travel and entertainment. Apart from writing, Barsha loves to travel, binge-watch, research conspiracy theories, Instagram and overthink.
