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8 Investing Rules to Follow Even When the Stock Market Drops

No matter what happens in the stock market, Laura covers 8 rules for investing wisely without taking too much risk. Learn how much you should invest and where to put your money so you create financial security even when the stock market drops. 

By
Laura Adams, MBA,
Episode #531
8 Investing Rules to Follow Even When the Stock Market Drops

3. Start early and small.

One of the most important factors in how much wealth you can accumulate depends on when you start investing. There’s no better example of how the proverbial early bird gets the worm than with investing.

Starting early allows your money to compound and grow exponentially over time—even if you don’t have much to invest. Compare these two investors, Jennifer and Brad, who set aside the same amount of money each month and get the same average annual return on their investments:

Jennifer

  • Begins investing at age 35 and stops at age 65 
  • Invests $200 a month   
  • Gets an average return of 8%  
  • Ends up with just under $300,000

Brad

  • Begins investing at age 25 and stops at age 65  
  • Invests $200 a month   
  • Gets an average return of 8%  
  • Ends up with just under $700,000

Because Brad got a 10-year head start, he has $400,000 more to spend in retirement than Jennifer! But the difference in the amount Brad contributed was only $24,000 ($200 x 12 months x 10 years).

So never forget to start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest and can catch up later. If you wait for a windfall, you’re burning precious time.

So never forget to start investing as early as possible. It’s a huge mistake to believe that you don’t earn enough to invest and can catch up later. If you wait for a windfall, you’re burning precious time.

Remember that investing early is like getting a healthy retirement nest egg on sale! It’s one of the best financial habits you can develop, even if you can only put aside small amounts on a regular basis.

Even saving or investing just $20 a month is better than nothing. And if you’re starting late, don’t stress about it—just get motivated to start right now. For most of us, building wealth is a slow journey that involves putting small amounts of money aside on a regular basis.

Setting up your accounts and automating contributions is a powerful step in the right direction. Years from now when you’ve got savings and investments to fall back on or to fund the lifestyle of your dreams, you’ll be so happy that you took control of your financial future.

See also: 8 Tips to Invest Without Too Much Risk

4. Don’t try to beat the market.

While it might sound boring, you should aim to be an investor who makes average returns. That’s because chasing high returns, reacting to short-term market volatility, and buying into media hype generally doesn’t work.

Investors think their choices must be right if other people are doing the same thing. The media says buy, so most investors get in the market. And when everyone else is in a panic and selling, that’s what most people do. When you invest emotionally you could end up buying high and selling low, which is the exact opposite of how you make money.

Yes, short-term investment returns can vary dramatically from day to day and month to month. But over the long term, market returns always revert to the average. So, stick to a long-term, buy and hold investment strategy for funds you won’t need to spend for at least 10 years.

See also: Are You Making Investing Too Complicated?

5. Be diversified to cut risk.

Many people are surprised to learn that it’s better to own more investments than less. This is a proven investing strategy called diversification. It allows you to earn higher average returns while reducing risk, because it’s not likely that all your investments could drop in value at the same time.

Diversifying doesn't increase investment returns all by itself. But it does allow you to reduce investment risk, and give you more safety and control, without lowering your return.

For instance, if you put your life’s savings into one technology stock and it tanks, you’re in trouble. But if that stock only makes up a fraction of your portfolio, the loss is negligible. Having a mix of investments that respond to market conditions in different ways is the key to smoothing out risk.

For most investors, who don’t want to make a career out of stock picking, buying individual stocks is a bad idea. It’s risky because stock prices can be volatile and fluctuate wildly. Trying to find one or two winning stocks is gambling, not smart, strategic investing.

But it’s easy and affordable to build a diversified portfolio by purchasing shares of a low-cost mutual fund or an exchange-traded fund (ETF). Funds bundle combinations of investments in stocks, bonds, assets, and other securities into packages that are convenient to buy because they’re made up of many underlying investments.

Diversifying doesn't increase investment returns all by itself. But it does allow you to reduce investment risk, and give you more safety and control, without lowering your return. If the price of one stock in a fund takes a dive, it’s no big deal because you own hundreds or thousands of other stocks that may be holding steady or going up.

See also: 5 Best Investing Tips to Make More Money

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