Investing can be tricky, but it doesn’t have to be. There are some well-known “secrets” that can make you a smarter investor.
So, instead of fearing stocks, lower your financial stress by learning these nine stock market secrets that will help you invest with confidence and avoid common mistakes made by newbies.
Staying invested is better than timing the market
Investing in the stock market may feel like a high-stakes game of poker, trying to figure out when to hold ‘em and when to fold ‘em. But attempting to time the stock market is usually a poor way to invest.
When the stock market falls, some people sell their investments and keep their money on the sidelines, hoping to ride out the bad times. But this can result in missing some of the best returns after stocks hit bottom and then snap back on their way to a big rebound.
While keeping some cash on hand for emergencies is a good idea, pulling the rest of your money out of the market can cost you dearly.
Index funds typically beat actively managed funds
Investing in stock market index funds is a great way to diversify your portfolio, allowing you to buy hundreds of companies via a single fund.
Some people prefer to buy actively managed funds, in which a fund manager regularly buys and sells individual stocks in an attempt to make educated guesses about the direction of the market. The goal is to try to beat average stock market returns.
But this strategy rarely succeeds. Morningstar regularly publishes a report comparing the performance between index funds and actively managed funds. A solid index fund typically outperforms almost all actively managed funds, according to Morningstar.
Index funds usually have fees that are much lower than the costs associated with actively managed funds. So they are usually a better bet than actively managed funds, where higher fees drag down returns.
Stock market returns compound over time
When you see that an investment returns 10% annually on average, that may not seem like a lot. However, that money can really grow over time, thanks to compounding.
Stock market returns compound year-over-year. To illustrate, let’s say you invest $1,000 and get a 10% return in your first year. You now have earned an extra $100.
In the second year, you again get a 10% return. But instead of growing by $100 — as it did in the first year — your account now grows by $110 since the 10% growth rate applies to both your $1,000 principle and that extra $100 return you earned during the first year.
When this happens year after year, your money can grow fast. If you invested $1,000 a year and earned an average of 10% a year over three decades, you would end up with $180,000. That is the power of compounding.
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The ‘average’ return you earn won’t be the same every year
Over its history, the U.S. stock market has returned an average of roughly 10% a year. But that doesn’t mean it is smooth sailing year after year.
Some years, the stock market hands you a 20% gain. In other years — like 2022 — it’s closer to a 20% loss.
Year by year, returns typically ride a roller coaster of ups and downs. So, while your investment may have a great average return over the long term, buckle up for the ride from year to year.
Pro tip: Let compounding work its magic over time as you get rich slowly. If you need cash in the short term, consider taking a part-time job, developing a side hustle, or looking into other ways to make more money.
You can trade stocks and ETFs for free
Until relatively recently, you typically had to pay a hefty fee every time you made a stock or exchange-traded fund transaction.
But that has all changed. Today, many investment firms allow you to buy and sell stocks and exchange-traded funds for free.
Each brokerage has its own rules, so make sure you clearly understand which fees you will have to pay (if any) and when they apply.
You can automate investments
One of the best ways to get rich is to invest the same amount of money in stocks through thick and thin, year after year. That can be tough to do when fear or greed overwhelms your emotions.
But today, investing has become easier than ever, thanks to the option to automate your purchases.
If you have a 401(k) plan at work, chances are good that a portion of your pay automatically comes out of your paycheck and goes directly into your retirement account. That is an example of an automated investment.
Investing websites and apps make automation easy, allowing you to set up a recurring investment schedule — such as monthly, or even daily.
Automating your investments — for both your retirement accounts and other investments — can be a great way to “pay yourself first” and avoid the temptation to spend idle cash.
The ‘Dow’ is only made up of 30 companies
The Dow Jones Industrial Average is one of the most often cited indexes for gauging the health of the stock market. But did you know it actually only includes 30 companies?
The Dow Jones includes large companies such as Apple, Boeing, McDonald’s, Chase, Microsoft, and Nike. These are some of the biggest companies around, but definitely are not fully representative of the thousands of publicly traded companies in the U.S.
ETFs can be a great alternative to mutual funds
Some people find exchange-traded funds to be a better way to invest than using mutual funds.
Both ETFs and mutual funds allow you to invest in a basket of companies through a single fund. But like stocks, ETF prices change throughout the day, and you can buy them as their price fluctuates.
By contrast, mutual funds receive one price per day, at the end of the trading day. That is the only price at which you can purchase them on any given day.
Mutual funds also often require the investor to purchase a minimum amount — such as $3,000 — while ETFs do not.
There are thousands of ETFs available, giving you a large number of options to choose from.
Bear markets last an average of 289 days
This has been a tough year for the stock market, and many of us are wondering when happier days will return.
For now, we are stuck in a bear market, which usually is defined as a market that has dropped 20% from its previous high. Fortunately, our current bear market is unlikely to go on forever.
In fact, the average bear market only lasts 289 days, according to the Hartford Fund. That means that while stock market drops are scary, they are relatively short-lived and generally do not survive for even a full year.
Want even better news? Bull markets — which are marked by a 20% rise from the low — typically last for 991 days, or 2.7 years, say the Hartford Fund.
Smart investing comes down to consistency and a solid plan. Knowing how the market works can help you avoid costly money mistakes and allow you to take advantage of the magic of compound interest.
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