Investing in the stock market does not have to be intimidating and overwhelming. You don’t need to be an expert, and you don’t need to have a real strategy. You only really need to follow two concepts: consistency and patience over time. These two foundations are the basics of investing for dummies and, if followed, everyone can make money over time in the stock market. Follow this guide.
Don’t try to time the market – you’ll lose.
Timing Is Everything
If you try to time the stock market, you’ll lose. Put money in and keep it in. As discussed in “5 Simple Investment Tips,” the market gained 7.8 percent between 1991 and 2011. If you put in $10,000 and left it in, you came out with $45,032 at the end. If you had pulled your money and missed the 10 best trading days of that period, you would have decreased to 4.3 percent, or $22,474.
Hedge your bets by spreading your money around to different securities, or preferably, different sectors. If the old adage about not putting your eggs in the same basket wasn’t written about the stock market, it should have been. By spreading it out, you’re insuring that you can absorb a hit in any one investment.
Get an Index Fund
One way to diversify and follow the first rule of leaving your money in over time is to get an index fund. An index fund is an excellent alternative to mutual funds, which provide diversification, but are at the mercy of a fund manager. Index funds merely mirror an index, meaning you’ll own an exact, but tiny little version of any given index. Say it’s the S&P 500. You’ll always have the same proportions of the top 500 stocks in the market – no matter how much money you have in your account.
Use Dollar-Cost Averaging
If you have a 401(k), you’re already using the miracle of dollar-cost averaging. When you put a set amount of money each month into your account – no matter what the stock market is doing – you’re buying fewer shares when the cost is high and more shares when prices drop. By always buying bulk when things are cheap, and just maintaining when things are expensive, you’re guaranteeing good returns over time. These are the basics of investing for dummies 101.
Consistency and patience are everything in investing.
Stock investing can be a complicated, adrenaline-filled rush of highs and lows – but it doesn’t have to be. In fact, for smart, careful investors, it’s quite boring. Put in a set amount every month to an index fund scheduled for dollar-cost averaging and – over time – you’ll be a winner.
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Andrew Lisa is a freelance finance writer. He covers investing and the stock market.