There is no question that investing in the stock market can be a great way to grow your savings as you look ahead to retirement, but many people are understandably reluctant or wary of doing so because with the potential gains come the risk of losing a large portion of your hard-earned money. If you are considering getting into the stock market, experts like Charles Whitman Infinitum will tell you that there are several important questions that any new investor should ask themselves first.
Who are you and why are you investing?
This is perhaps the most important question that you can ask yourself as you consider investing in the stock market because it will have a bearing on the kinds of stocks you should buy, how long you have to grow your holdings, and how much risk you should accept. If you are 25 years old, single with a good job and are getting a start on saving for an early retirement, your needs and options are quite different than if you are married with 2 kids and concerned about paying for university fees, or 55 years old with very little saved for your retirement.
How do you feel about risk?
No matter who you are, a balanced portfolio will have different kinds of holdings that have different degrees of risk attached. To some degree, your risk profile will be influenced by how you answer the first question – 25-year olds with no children can afford to take some risks because they have a long working life ahead of them to recoup any losses. However, they are getting such an early start that they could afford to be quite conservative and still generate solid returns. Even though a 25-year old would probably be advised to have a higher percentage of higher-yielding but riskier holders, it may simply be the case that they are naturally risk-adverse and can still accomplish their goals with a more conservative approach. The point is that the industry will have a general sense of how much risk you should be prepared to take based on your age, goals, and circumstances, but you should reflect on your own preferences. If the thought of riding a stock-market rollercoaster will keep you up at night, even if your broker feels that your portfolio would weather some risk, then it is better to go with your gut.
How personally involved do you want to be?
If you decide that you want to be personally involved in selecting your stocks, you need to be prepared to spend a number of hours each week reading about particular companies and making decisions about buying or selling in the context of other market considerations. If you prefer not to be involved to this degree, then you might prefer to purchase mutual funds or index funds instead, which are managed by fund managers who maintain a diversified portfolio. Thinking again about risk, directly investing is stocks is a much riskier – and potentially more profitable – undertaking.
These are just some of the preliminary questions that new investors should take the time to consider. Whether you work with a professional or decide to jump in yourself, your answers to these questions should form the foundation of a strategy for investing that you feel comfortable with.