The stock market can seem like a dense forest through which there are no well-marked paths, but the reality is less scary. There aren’t just tried and true paths, there are modern freeways that can carry you to a successful outcome in the market. If you stay on these major expressways, you can make money in the stock market over the long term.
Here are some sign posts to watch for:
Somewhat like stop and go traffic, stocks go up and down randomly each day. You can’t predict what they’ll do over the short term. Over time, you can predict that on average stocks rise in value. Be patient and you’ll eventually get where you’re going.
There are some dangerous cliffs alongside this highway. Some stocks will fall to zero in value. Be prepared for that by never putting more than 10 percent of your money into a single company’s stock. If one stock goes to zero but the other 15 stocks you own all go up, the tale of woe will make a good story at the end of your journey. If it is the only one you own, you may never get to the end of your journey.
Stay in your lane
When you build a portfolio, be prepared to hold it for the long haul. The best time to sell a stock is when it has gone up so much that despite your prudent investing only a small portion of your portfolio in the stock, it now represents more than around 15 percent of your portfolio. Sell at least half to get your exposure to that stock well below 10 percent. Stocks that go down in value are often good candidates for a bounce. Stay the course.
Toll road this way
There is an easier way through the stock market that doesn’t require you to know or worry nearly so much. If this all sounds scary to you now, consider investing in the stock market using mutual funds. If you are careful, you can choose low fee mutual funds called “no load funds.” You get the benefit of having a professional who is paid very well to manage your money, but your share of the fees is tiny. This may be the fastest way to your destination.
In addition to investing in the stock market, it is prudent to have some investments in bonds (which you can also buy using mutual funds) and real estate. Direct investments in real estate are best for people with lots of money, but small investors can invest in real estate using (you guessed it) mutual funds.
By following these basic sign posts on your journey through the stock market to retirement, you can relax and enjoy the scenery, comfortable in the knowledge that you’ll get where you want to go in the style you were seeking. Be sure to keep adding to your investments over the years.
Devin Thorpe, husband, father, author of Your Mark On The World and a popular guest speaker, is a Forbes Contributor. Building on a twenty-five year career in finance and entrepreneurship that included $500 million in completed transactions, he now champions social good full time, seeking to help others succeed in their efforts to make the world a better place.