When the stock market goes up, the masses are tempted to start buying. While stocks are not the only investment around, they tend to get the most press coverage. Before investing in stocks, it’s a good idea to come up with a plan before making investments. Here are some considerations to take into account.
Have a Plan
It’s a good idea for would-be investors to have a plan before making investments. One of the most important considerations when coming up with a plan is tied to the question of the investor’s time horizon. Does the investor plan to need the investment and any returns in five years or 50? Long-term investments can be a bit more risky to take advantage of better returns over the long run. Short-term investments should tend to be more conservative. Some people will have short-term and long-term goals. These folks should probably invest in different accounts with different risk profiles.
Take Risk Tolerance into Account
Prospective investors should take their individual level of risk tolerance into account. Bigger risks can lead to bigger rewards, but this does not mean everyone is comfortable taking big risks. People who need money within a few years and those who might have a low tolerance for risk should be more conservative than those who are comfortable taking on more risk. Those with a low risk tolerance will likely sell when the market goes down, and this is the best way to lose money when investing.
With the exception of diversified funds, investors should avoid making a single investment. What if that one company goes bankrupt? The investment will become worthless. That’s why it’s important to invest in multiple companies or funds that provide adequate diversification. If one company fails, there will be others to pick up the slack.
Have Cash on Hand
It’s always a good idea to have cash available before making investments. First, this money could serve as an emergency fund. A common recommendation is to keep three to six months of expenses saved up in cash. An additional benefit of having some cash on hand is the ability to take advantage of sales. When the market goes down, those with cash have the opportunity to buy solid stocks at a discount. Those who have no cash will not have the same luxury.