[dropcap background=”” color=”” circle=”0″]P[/dropcap]utting money in the stock market is always a big step, regardless of what your goals are. However, no matter what you hope to achieve specifically, everyone wants to see their money grow. Unfortunately, too many people aren’t realistic about their expectations. This is an easy way to end up disappointed, but it can also mean that you find yourself making poor choices as you strive to meet unrealistic targets.
A Sober Approach
You’ve probably heard your fair share of stories documenting some investor who hit it big in a short period of time. Maybe they got lucky or perhaps it was some rebel trader who figured out the perfect opportunity. Whatever the case, it’s important to view these stories for what they are: often untrue and, at best, extremely rare.
In any case, far more people have lost money in the stock market than have won small fortunes instantaneously. They key to investing with realistic expectations, then, is to look at the sum of winners and losers over a long period of time.
For the most part, stocks return 8% to 10% over the long term. This is a substantial amount, but tends to be far shorter than what most beginning investors expect. Even in a place like Asia, where the market has been much healthier than in the West, returns over the past 10 years have been around 10%.
There is at least one important way you can fortify your chances of seeing returns closer to 10%. This tactic will also represent a huge step towards staying away from unnecessary risks.
An easy mistake to avoid, which countless beginning investors make, is buying individual stocks. While this can certainly seem like an attractive opportunity, it opens you up to far too much risk. All it takes is one poor decision by the company, one smart decision by a competitor or some bad luck to befall the industry and your money can be gone for good.
For this reason, it’s even worse to buy multiple stocks and try managing them all on your own. In order for you to be successful at such an endeavor, you’d need to answer “Yes” to the following questions:
- Are you interested in picking stocks?
- Do you have the time to do so?
- Are you knowledgeable about how to pick and manage a portfolio?
Don’t let this exercise convince you that you can’t make money in the stock market. Instead, look into investing in mutual funds. To put it simply, mutual funds are groups of stocks. Companies hire professionals who pick the stocks they think are the best possible investments, with the goal of beating the market’s average returns.
Mutual fund managers decide when the right time is to put money into the market. They analyze and study the sectors and pick the best stocks they can to invest in.
Along with trying to outdo the market, managers also compete against various benchmarks, which are collections of stocks used by analysts to judge the health of any one fund.
Aside from having someone else do the picking and managing of stocks for you, the other main advantage owning mutual funds provides is your protection from unnecessary risk. With so many stocks in a given fund, company specific risk is greatly reduced. No one version of bad events we mentioned above can sink your entire investment.
Remaining realistic about your investing goals is twofold. First, understand that returns of between 8% and 10% are an optimistic, albeit not impossible, goal to have for your money. Secondly, the vast majority of people should be putting their money into mutual funds, not individual stocks.