Investing can be difficult, but it doesn’t have to be. There are some well-known “secrets” that can make you a smart investor.
So, reduce your financial stress by learning these nine stock market secrets that will help you overcome fear of stocks, invest with confidence, and avoid common mistakes made by newbies.
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1. Investing is better than timing the market
Investing in the stock market can seem like a high stakes game of poker, trying to figure out when to fold and when. But trying to time the stock market is usually a poor way to invest.
When the stock market falls, some people sell their investments and put their money on the street, hoping to ride out the bad times. But this could cause stocks to miss out on some of the best returns after hitting the bottom and put them back on track for a big recovery.
While it’s a good idea to keep some cash on hand for emergencies, taking the rest of your money out of the market can cost you dearly.
2. Index funds typically beat actively managed funds.
Investing in stock market index funds is a great way to diversify your portfolio, allowing you to buy hundreds of companies with a single fund.
Some people prefer to buy actively managed funds, in which the fund manager regularly buys and sells individual stocks to make educated guesses about the direction of the market. The goal is to try to beat average stock market returns.
But this strategy rarely succeeds. Morningstar regularly publishes a report comparing the performance of index funds and actively managed funds. According to Morningstar, solid index funds outperform almost all actively managed funds.
Index funds have much lower fees than the costs associated with actively managed funds. So they often outperform actively managed funds, where higher fees drag down returns.
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3. The stock market has returned over time
When you see that an investment returns an average of 10% per year, that may not seem like much. However, that amount can grow over time, thanks to compounding.
The stock market returns year after year. To illustrate, let’s say you invest $1,000 and get a 10% return in the first year. You just got an extra $100.
In the second year you get 10% return again. But instead of growing by $100 — as it did in the first year — your account now grows by $110 because the 10% growth rate is applied to both your $1,000 principle and the extra $100 you earned in the first year.
When this happens year after year, your money can grow quickly. If you invest $1,000 a year and earn an average of 10% a year over three decades, you’ll end up with $180,000. That’s the power of compounding.
4. Your ‘average’ return will not be the same every year
Historically, the US stock market has returned an average of about 10% per year. But that doesn’t mean it’s been smooth sailing year after year.
Some years, the stock market will give you a 20% return. In other years – like 2022 – it’s closer to a 20% loss.
Year after year, returns typically ride a roller coaster of ups and downs. So, while your investment may have good average returns over the long term, plan for the year-to-year journey.
Tip: Let compounding work its magic over time as you gradually become richer. If you need money in the short term, take on a part-time job, develop a side hustle, or find other ways to make extra money.
5. You can trade stocks and ETFs for free.
Until recently, every time you traded a stock or exchange, you had to pay a hefty fee.
But all that has changed. Today, many investment firms allow you to buy and sell stocks and trades for free.
Each broker has its own rules, so make sure you clearly understand what fees you have to pay (if any) and when you apply.
6. You can make investments automatically
One of the best ways to get rich is to invest the same amount of money in thick and thin stocks year after year. It can be hard to do when fear or greed overwhelms your emotions.
But today, investing has become easier than ever thanks to the option to automate your purchases.
If you have a 401(k) plan at work, chances are good that a portion of your paycheck will be taken directly out of your paycheck and directly into your retirement account. That is an example of auto investing.
Investing websites and apps make automation easy, allowing you to schedule recurring investments – like monthly or daily.
It can be a great way to “pay yourself first” and avoid the temptation to spend idle cash on your investments — both for your retirement accounts and other investments.
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7. The ‘Dow’ is made up of only 30 companies.
The Dow Jones Industrial Average is one of the most commonly used indices to measure the health of the stock market. But did you know that it actually only includes 30 companies?
Dow Jones includes large companies such as Apple, Boeing, McDonald’s, Chase, Microsoft and Nike. These are just a few of the biggest companies around, but they certainly don’t represent the entirety of the thousands of publicly traded companies in America.
8. ETFs can be a good alternative to mutual funds.
Some people find it a better way to invest than using mutual funds.
Both ETFs and mutual funds allow you to invest in a basket of companies in one fund. But like stocks, ETF prices change throughout the day, and you can buy them when prices change.
Mutual funds, on the other hand, receive one price per day at the end of the trading day. That’s the only price you can afford on any given day.
Mutual funds also require the investor to buy a minimum amount — like $3,000 — but ETFs don’t.
There are thousands of ETFs available, giving you many options.
9. Bear markets last an average of 289 days.
It’s been a tough year for the stock market, and many of us are wondering when the happy days will return.
For now, we are stuck in a bear market, which is usually defined as a market that is down 20% from its previous high. Fortunately, our current bear market is unlikely to last forever.
According to The Hartford Fund, the average bear market lasts only 289 days. That means that while stock market crashes can be scary, they are relatively short-lived and generally don’t even survive a year.
Want even better news? Bull markets — characterized by a 20% rise from a low — typically last 991 days, or 2.7 years, according to The Hartford Fund.
Smart investing comes down to consistency and solid planning. Knowing how the market works can help you avoid costly financial mistakes and harness the magic of compound interest.
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