If you're nervous about investing in the stock market, you're not alone. According to a recent Gallup Poll, only about 55% of Americans own stock, whether it's in the form of individual stocks, mutual funds, or in a 401(k) or IRA.
Investing can be intimidating, particularly during periods of volatility. But it remains one of the best ways to build wealth, so it can pay off over the long term. And there are a few ways you can limit your risks while still reaping the rewards.
1. Diversify your portfolio
The saying about eggs and baskets holds true for investing, and it's crucial to avoid throwing all your money behind just one or two stocks. If those investments take a turn for the worse, you could potentially lose a lot of money.
If you're investing in individual stocks, aim to have at least 10 to 15 different stocks in your portfolio. There's no way to eliminate risk entirely when investing, but the more companies you invest in, the less chance you have of losing a lot of money if one or two of those stocks drop in value.
Keep in mind, though, that investing in too many stocks can quickly become overwhelming. When you invest in individual stocks, you'll need to stay up-to-date on how the companies are performing so you know whether to hold on to your investments or sell. If you're investing in several dozen different stocks, it can be tough to keep up with each company. Although diversification is key to a healthy portfolio, it's also important to find a balance to avoid feeling overwhelmed.
2. Consider investing in index funds
If you're not keen on the idea of doing loads of research when investing, an index fund may be a better option than individual stocks.
Each of these funds tracks a particular stock market index, such as the S&P 500, the Dow, or the Nasdaq. The index fund includes all the stocks within the index it tracks, so you don't have to choose which stocks you want to invest in. In addition, many index funds contain hundreds or even thousands of different stocks, so you can instantly diversify your portfolio by investing in a single index fund.
Another major advantage of index funds is that they're among the lowest-risk investments you can find. Because they're designed to simply follow the market, you'll see less volatility and more consistent returns over time. You may not see explosive growth like you could with certain individual stocks, but you will experience slow-but-steady gains over the long run.
3. Be prepared to leave your investments alone for as long as you can
Investing in the stock market is playing the long game. Timing the market is nearly impossible, so it's better to put your money behind solid investments and then wait. It may take years or even decades to see substantial returns, so patience is key here.
It can be nerve-racking to watch your investments bounce up and down, but if you pull your money out of the market every time stock prices drop, you won't see as much long-term growth.
The market will always experience some degree of volatility, but over time, it does achieve positive returns. Even when the stock market took a serious tumble back in March, it still managed to make a remarkable recovery. There will inevitably be more market downturns, but as long as you leave your money alone and don't panic-sell, you can ride out the storm, and your investments will likely come out the other side even stronger.
Investing in the stock market will always carry a certain amount of risk, which can be daunting. But by taking these steps, you can build your long-term wealth while keeping your money as safe as possible.