Many of you will have been astute enough to notice the fall in the stock market. Subsequently, you will want to know, how and where to invest money while the Covid-19 impacts the stock market. However, you might feel reluctant to part with your money in these uncertain times. You may feel worried that if you invest it in the wrong way that you will lose it all. When I read the advice out there, I come across so many acronyms and platforms that I am yet to learn myself, so this must be baffling for someone who is completely new to investing.
Knowing how, where and when to invest money in the stock market can be difficult.Therefore I wanted to write a very simple post to highlight my strategy when it comes to investing through these volatile periods. I will cover just 3 simple factors to take into consideration, which you can go away and google to your heart’s content. This strategy can be applied in the same way regardless of your income or wealth. You may have £500 to invest or £5,000.
- Index Funds
- Pound/Dollar Cost Averaging
- Buy & Hold Strategy
Disclaimer: This article should not be considered as financial advice. You are responsible for your own financial research and decisions.
Andrew | Money Side Up
How To Take Advantage Of The Self-Clensing Nature Of The Stock Market
Investing in index funds is a very simple strategy of buying up a significant part of the market, as opposed to trying to find and invest in individual stocks. It’s constructed to match or track the components of a financial market indices such as the FTSE 100 or the S&P 500. The FTSE 100, for example, is the top 100 companies listed on the London Stock Exchange. Buying into this index means that you essentially invest in all 100 companies at once without having to make individual trades. It all means that you don’t have to commit time and mental bandwidth to worrying about if the stock you invest in will go bust.
The efficient market hypothsis argues that through a process of natural selection the fittest stocks surive. The market index is self-cleansing. Which means that as a company performs worse, it drops down the index and eventually into the next tier (or goes bust). As this happens a growing company will push up into the FTSE 100 for example.Whilst we all experience the volatility of the market, as you are seeing now, the market will recoupe and grow over time. Assuming that factors such as innovation, market efficiencies and population growth are in our favour. Therefore despite the expansion and contract economics cycles the market has historically always grown over time.
Managing Cost Is Key Is Bear Markets
Index funds tend to have low-costs and this can also support your long-term returns. Investment managers with complex funds and asset allocations rarely beat the market. The important thing to remember is that even when your portfolio is making poor or negative returns you will still have to pay these high ongoing on transactional cost. This all seems fine when the market is performing great but when you are losing money, high fees will only reduce your returns further and add to your woes. By constrast the low fees associated with index funds will keep your cost base minimal and your returns fractionally higher.
Index funds also invest in a wide array of stocks. Diversification across geographies and sector can help with managing volatility. For example, if 100% of your allocation would have been in tech stocks during the .com crash you would have been in trouble. The low cost fundamentals of index funds are just one of the Reasons Anyone Can Invest With Less Than £100. You don’t have to be wealthy to invest in index funds.
How To Invest Your Way Through The Bear Market
Averaging out your investment can help you ride the highs and lows of the stock market. You may be trying to guess when the best time to invest, given the current Coronavirus situation and extremely volatile market. My answer to this is right now because it’s about time in the market and not timing the market. Yes, the market could go down further or stagnate for another year or two. Yes you could speculate and try and judge the best time to invest. However, it’s psychologically important to make that first step. You can do all the research you want, and whilst this is important, you risk not taking any action at all.
You might risk the scenario where the market goes up, you feel like you missed your opportunity and then you never invest. Luckily this concern can all be mitigated, by either investing in tranches over the course of the bear market or even more simply to just pound cost average by investing a consistent monthly sum in. Averaging out your investments over time simplifies the question of how and where to invest money in the stock market.
Adding small amounts over the course of time you may make you feel more as ease. Psychologically making large financial commitments at any one time is difficult. In the event you invest £1,000 then the market crashes by 30% it might be difficult to stomach. By contast, investing £250 each month will feel like less of a sacrifice if the market drops.
Decide On An Investment Strategy & Stay The Course
Design a tailor made investment plan that meets your investment goals. You need to consider the types of assets you want to invest in as part of a long-term investment plan. How much growth vs volatility you want to see may decide your allocation of stocks vs bonds for example.
A long-term investment plan means that you won’t meddle with your investments for the next 15 or 20 years. That’s other than to dollar or pound-cost-average your investments or even add a lump sum here and there.This way if the stock market goes down, you are still buying and if it goes up you will be making money.
Many investors and speculators attempt to figure out when the market will hit the top. They dip in and out of the market and cash out when they think it’s all about to come crashing down. This is a behavioural which has been shown to halve aninvestors returns. By comparison staying invested might result in you taking the brunt of the worst days of the market but you will also see the best. Which is one of the reasons that market crashes can be an opportunity for young investors.
How & Where To Invest Money: Tips To Get Started With Investing
I’m aware this was quite a short post, I didn’t want to overdo it this time with the details and statistics. Should you want to get a little more support with where to get investing, then I have created a step-by-step guide to opening your first investment account. This guide will walk you through:
- Which platforms you can use to invest.
- How to avoid paying tax on your investments.
- How to open an account.
- An easy method for selecting a fund.
- How to understand more about the fund
- Estimating your returns
- How to start paying into your new investment fund
- Precautions you should take based on your risk tolerance.
Breaking the ice with investing can be tough and I’ve been through this process. There is so much information on investing out there, but responsible investing is actually very simple and straightforward. To the extent that I have deconstructed it into just 10 steps for you. Understanding how and when to invest money in the stock market doesn’t have to be overwhelming and with this guide, you can avoid those feelings. Download this simple and straightforward guide to building wealth today.
Trackbacks/Pingbacks