Investing can be an intimidating process. During a recession, it's even more challenging. If you're in the dark about how to invest, you're definitely not alone. An estimated 38% of Americans said they need help with investing or choosing stocks in a recent SoFi survey. With that in mind, here are a few tips that apply to both newbies and seasoned investors alike.
1. Only invest money you don't expect to need for seven years or longer
The stock market can be extremely volatile, clocking in gains one day and plunging the next. The best way to avoid losing money in it is to only invest cash you don't have a near-term need for. That way, you'll be in a position to leave your portfolio alone and give it time to recover from market downturns that might ensue.
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2. Adopt a buy-and-hold strategy
Investors who load up on stocks with the intent to sell them quickly at a profit tend to get burned. A better bet is to seek out quality stocks and hold on to them for many years -- ideally, a decade or longer.
3. Focus on dividend stocks
Stocks that pay dividends are a good bet for a few reasons. First, they provide an ongoing stream of income that you can either access as needed or reinvest for added wealth. Second, they provide a bit of protection during periods when the market is down, because often, they'll continue paying despite the turbulence that might ensue at the time.
4. Diversify your holdings
When economic conditions spur a recession, stock values can drop on the whole. But sometimes, it's only certain industries that respond poorly to a greater situation or crisis. Take the travel industry. Right now, cruise lines and hotel chains are hurting due to the impact of COVID-19. Now, imagine you had 60% of your portfolio in travel stocks; you'd be looking at some serious losses (at least on paper or on screen). But if travel stocks only comprise 10% of your investments, things aren't as bleak.
That's why diversification is so important, and you can achieve it in a number of ways. First, you can buy individual stocks from different market sectors -- for example, a handful of bank stocks, some auto stocks, some energy stocks, and a mix of retail and pharma stocks. Or you could load up on index funds. When you buy shares of index funds, you effectively get a bucket of stocks that lends to instant diversification -- all without having to spin your wheels or do a ton of legwork.
5. Don't attempt to time the market
Numerous studies have proven that timing the market just doesn't work. A better bet is to invest money regularly using a strategy called dollar-cost averaging. There, you commit to buying shares of stock at preset intervals, regardless of what their values look like at the time. The logic is that you're more likely to wind up with an average share price that's lower than what you'd snag by attempting to buy stocks at what you deem to be just the right time. And the less you pay per share, the more you stand to gain.
If the idea of investing intimidates you, you're in good company. Use these tips to start building a portfolio that helps you achieve your long-term financial goals, all the while avoiding the dangerous investing mistakes so many people make.
