When I first started buying stocks, I'll admit that I found the process daunting. Part of that stemmed from my fear of losing money. But also, I felt a bit in over my head -- even though I'd done plenty of reading on how to analyze stocks and had developed a strategy for choosing the right ones.
If you're new to the world of investing, you may have your own trepidations -- and that's natural. But here are a few important things to know as you go about the process of building a portfolio and growing your personal wealth.
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1. Market swings are normal
If you started investing earlier this year, you may have experienced a pretty wild ride. Stocks have been extremely volatile due to a host of factors, so much so that even seasoned investors have had their own prolonged moments of stress.
But one thing you should know about the stock market is that volatility is normal. And while market corrections -- periods when stock values drop 10% or more -- can be nerve-wracking, they're also pretty common.
As such, don't panic when stock values tank. Often, what you're looking at is a temporary hit to your portfolio.
In fact, it's really important to not lose your cool and sell off stocks in a panic when investment values fall. Doing so will create a scenario where you've locked in losses on a permanent basis.
2. Diversification is extremely important
It's a bad idea to put the bulk of your money into just one or two stocks, or even one or two market sectors. If those specific stocks or sectors take a hit, you could be out a lot of cash if their recovery is prolonged or if, for some reason, a full-fledged recovery never happens.
That's why maintaining a diverse investment mix is a much safer bet. And you can do so in a couple of different ways.
First, you can load up on individual stocks across a range of market sectors. While there's no specific number to aim for, you may want to buy shares of at least 12 different companies as a starting point.
Another way to diversify is to buy shares of an S&P 500 ETF, or exchange-traded fund. The beauty of ETFs is that they make it possible to own a whole bunch of different stocks with a single investment. And ETFs also don't require the same intense research you should be putting into individual stock purchases.
3. Patience is key
The stock market has a solid history of rewarding people who invest in quality businesses and hold their stocks for many years. If you want to make money in the stock market, you should aim to take a similar approach. That means buying companies you can see yourself hanging onto for decades.
Incidentally, S&P 500 ETFs are investments you can plan to hold for many years. What'll happen is that as the market goes up, your portfolio value will follow suit. When the broad market tanks, you'll see some losses -- but in the long run, you should come out ahead.
Being a new investor can be challenging. These tips can help you navigate the process and set you on a path to long-term success.
