Let’s face it: Financial markets are scary. A few ticks up and untold billions are created seemingly out of thin air. A quick move in the other direction and it all goes up in smoke.
These seemingly random gyrations are enough to keep millions of investors out of the market. All the investment books in the world can’t convince these well-meaning folks to come off the sidelines and take control of their financial futures.
That’s a shame, because—all other things being equal—it’s usually better to be in the market than out. If you’re a novice investor working up the courage to stake your claim, you’ll want to digest these six basic facts about playing the market. And then, just maybe, you’ll want to enter the game.
1. It’s Really Hard to Pick Stocks
Picking stocks isn’t impossible, but it’s pretty darn hard. Most market newbies stick to diversified funds and other instruments that insulate (at least in theory) investors from excess volatility. If your sights are set on picking your own stocks, make sure your money manager has a proven track record.
2. Investing Is the Best Way to Counter Inflation
During market downturns, it’s perfectly reasonable to feel compelled to cash out your 401(k) and stuff everything under your mattress (or in a nice, safe, low-yield savings account—pretty much the same difference).
Fight this temptation! Over time, investing is the best way to keep your savings from eroding under the corrosive influence of inflation. Even low-inflation regimes, like we’ve seen since the Great Recession, reward investors who grit their teeth and stay in the market.
3. You Don’t Need to Be Rich to Invest
It’s a common misconception that you need to be rich to invest in the stock market. Truth be told, anyone with an employer-sponsored retirement account is an investor, even those who don’t think of themselves as such. Sure, middle class investors don’t make or lose millions in a single trade, but their long-term investments act as a stable foundation for global equity markets.
4. It Pays to Keep Your Eyes on the (Future) Prize
You’ve heard the tantalizing stories about day traders who play the markets just so and get rich enough to retire at 35, or trade stocks on the beach, smartphone in one hand, piña colada in the other. Think you’ve got what it takes?
Think again. For most investors, it’s all about the future—as in, the many-years-from-now future. It’s never too late to start investing, but it’s often too early to cash out.
5. The Market Does Go Down
Remember high school physics class? Well, the whole “what goes up must come down” thing applies to financial markets too. Sure, it’s nice when the market goes up, but anyone who expects uninterrupted up-and-to-the-right progress has another think coming. The trick is not to get spooked when those inevitable downturns occur. And, if you have adequate cash reserves, downturns are actually great opportunities to buy low.
6. Don’t Be Scared!
Another point about fear: A little fear is healthy when the future of your nest egg is at stake. Just don’t let legitimate concerns about the direction of the market and the composition of your investments overpower your good judgment or trap you in a paralytic state. Most of the time, you can undo questionable decisions.