May 6, 2021
Investing in the stock market should be pretty easy, right? After all, all you need to do is buy low and sell high.
Well, it turns out, it’s not that easy. Trying to time the stock market is almost impossible and overall, not a good strategy. In fact, there's an old investing adage that says, “Time in the market beats timing the market.” With that being said, the more time you have to invest in the market, the better your chances are to grow your money.
So does that mean you should start investing as early as possible? The short answer is: it depends.
It depends on your age and situation. When you’re young and have many years ahead of you, you can use the power of compounding interest to your advantage. Compound interest is when the interest associated with your investment increases exponentially—rather than linearly—over time. Compounding interest is an investor’s best friend and can help grow your portfolio over a number of years.
How do you know when you’re ready to start investing? Here are 6 signs you’re prepared to invest in the stock market:
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- You have a long time horizon
- You have a set goal of why you’re investing
- You know your own risk tolerance
- You’re able to save
- You have an emergency fund in place
- You can establish a Dollar Cost Averaging strategy into a diversified portfolio
To combat the concerns that come with investing in the stock market, you can be prepared by figuring out your unique risk tolerance, timeframe, and goals. If your time horizon is more than five years and you can stomach the ups and downs of the stock market, then you shouldn't concern yourself with timing the markets.
If you’re able to save money and have enough set aside for emergencies, you can get started with investing in the stock market with a simple strategy that many people use known as Dollar Cost Averaging, or DCA for short.
What is DCA?
According to Investopedia, DCA is an investment strategy in which an investor divides up the total amount to be invested across periodic purchases of a target asset in an effort to lessen the impact of volatility on the overall purchase.
An example of DCA would be to invest $500 a month into the same portfolio. This way if the portfolio goes up or down in value, you're not timing the investment. Instead, you’re getting an average cost for your purchases. This strategy works well in a retirement account, especially from your employer. If you’re eligible to make 401k contributions, you can select a specific amount or percentage of your paycheck to get deducted and added to your retirement account. Over the years, these contributions can compound and grow—the trick is to get started early.
Lastly, a diversified portfolio helps dampen the volatility in your account. For example, if you only owned the stock of one company, your account value would go up and down with that one stock. But if you own stock in a hundred different companies, it would be rare that all hundred stocks would move in the same direction. This can help minimize the ups and downs of your portfolio.
Having a solid understanding of your tolerance preferences, timeframes, and investing goals can help you feel confident when investing in the stock market.
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