For the past 10 years we have been in a bull market – the longest one in history. But recently, market volatility and rumors of a potential bear market on the horizon have raised alarm bells with investors. Younger investors, in particular, are increasingly concerned because they have never experienced something like this. As volatility continues and the market shifts, this is the perfect time to learn about stock market basics.
For younger investors, bear markets may actually lead to increased opportunities. During a bear market, stocks are typically sold at a discount from their bull market trading price. Given the lower-cost environment, the monetary barriers to investing are significantly reduced. In fact, it can be an opportune time to take advantage and invest aggressively. Because of your young age, despite any current volatility, you will more than likely still benefit in the long-term, as the market will make another upswing during your lifetime.
If you’re new to investing in the stock market, here are four basic steps to kick-start your learning.
Partner with a Financial Planner
As you start your journey into investing, reach out to a professional with experience for guidance. They can help you identify goals and develop an investment strategy to achieve them. They can also help you adjust your strategy as your goals evolve over the years and your lifestyle, and your goals, inevitably shift and change.
Finding the right financial planner to partner with requires research. As you look at the qualifications of potential financial planners, make sure three letters follow their name – Jane Doe, CFP®. CFP® professionals are experienced and deliver the best-in-class standard for financial planning that is always in your best interest. Find a CERTIFIED FINANCIAL PLANNER™ professional in your area here.
Identify Your Investing Style
Investing style is the philosophy you and your financial planner will follow to help you achieve your goals. To identify your style, have an honest conversation with your financial planner about your risk tolerance – which will fall somewhere on the spectrum ranging from conservative to moderate to aggressive. Conservative investing favors lower risk and income generation, while aggressive investing has a higher tolerance for risk in favor of higher returns. A moderate investing style falls between conservative and aggressive.
Set a Budget
Just like setting a household budget, stock market basics start with setting an investment budget. A financial planner can help you identify how much you should invest based on your income and living expenses. As you work to identify a dollar amount, make sure you also look into different types of investment vehicles.
Prices of investments vary. The price of stocks depends on the cost of an individual share and can range from a few dollars to several thousand dollars. A mutual fund bundles many stocks into one investment and often has a minimum price of $1,000 or more. If you have a smaller budget, an ETF also invests in different assets but often has a lower minimum investment.
Diversification is the key to success. Because similar instruments and industries react the same way to an event, diversifying your investments will help minimize risk and reduce the impact of market volatility.
Diversification is also an integral aspect of holistic financial planning. As a younger investor, there are many life goals you want to achieve before retiring. Working with a financial planner to diversify your portfolio will help you prioritize saving for retirement while simultaneously saving for a down payment for a house or a large expense – like a wedding or college education for children.
As you learn the basics of stock market investing, partner with a CFP® professional to identify your investing style, set a budget and diversify your assets to maximize your success.