A July 2016 Bankrate report revealed that as many as 54 million Americans were more concerned with stocking up cash than building any investment that they did not need for 10 years or longer. Having an emergency fund is desirable and offers peace of mind for unexpected expenses. However, cash investment alone is not sufficient for long-term goals. The survey revealed that the number one preferred investment was real estate. Cash came in at second, with stocks and precious metals tied in third place. Bonds were last on the list of popular investments.
Here are answers to frequently asked questions about investing.
1. Why Should You Invest in Stocks?
Investing in stocks offers you the opportunity to grow your money over time. There are risks associated with stocks as they can go up and down in value. There are also opportunities to grow your money significantly when you have large returns. Putting money into stocks yields more of a return than putting your cash in a savings account or stocked away in a jar, where it just stays the same value. (For more, see: Investing 101: Types of Investments.)
2. What Kind of Stocks Should You Invest in?
The answer to this question depends upon your personal investment goals. For example, if you are looking for a safe investment, you may lean towards blue-chip stocks. If you are looking to make big gains and are willing to take on some risks, your portfolio may contain a lot of tech stocks. Diversifying your portfolio with a variety of stocks and industry sectors is suggested. You also can invest in a set or range of stocks using index funds, mutual funds and exchange-traded funds (ETFs). Learn more about the companies whose stocks you wish to purchase. Pay attention to history of earnings, stock prices over the last year and read analyst reports and ratings.
3. Why Do People Invest in Both Bonds and Stocks?
Buying bonds and stocks is an example of portfolio diversification where the investor aims to have a variety of investments to mitigate risk. Typically, stocks are considered riskier investments than bonds. Bonds typically earn a lower rate of return than stocks.
4. Why Do People Consider Bonds Safer Than Stocks?
Bonds are issued by a government agency or a company. They are basically loans that you buy with the expectation that you will get paid back over time with interest. There is some risk involved but most issuers keep their plans. Hence, bonds are considered safer investments compared to stocks that are investments in publicly-traded companies whose value can go up and down considerably.
5. Why Would You Invest in a Fund Instead of Individual Stocks and Bonds?
There is a greater potential for loss if you put all your money into just one stock. You could lose a lot of money if the stock or bond went down and did not recover. Investing in a fund offers you greater diversification with access to hundreds of stocks and bonds. (For more, see: Bond Basics Tutorial.)
6. Why Do Stock Prices Fluctuate Up and Down So Much?
Stock prices go up and down a lot because they are affected by market conditions that can range from changes in supplier or distribution costs, introducing new products or services to changes in oil prices, market stability and more.
7. How Long Do You Hold on to a Stock or Bond?
The cash you invest in stocks and bonds is ideally not money that you will need immediately. Investments often go up and down in value and you do not want to be in a position where you have to sell because you need the money and your stock is down. Investors usually have goals in mind such as saving for a house down payment or retirement goals. There are times when you will want to sell a stock because the company is making internal changes. You may want to continue to hold on to the stock if you think the company’s future earnings will outweigh current changes or downturns. Investors often hold bonds to maturity or the period when the original amount loaned out to the issuer is due to get the full value of the investment. Sometimes investors sell bonds earlier for personal reasons using a broker.
8. How Do You Know When a Market Fluctuation Is Normal Or Not?
Markets fluctuate on a daily basis. It is helpful to compare the performance of a stock to a benchmark. You can expect stocks you own to go up and down relative to these benchmarks such as the S&P 500. Look at the reasons why a stock is dropping in value and how that stock is performing before you make any decisions.
9. What Do You Do When the Market Drops a Lot Quickly?
When the market drops significantly in a short period of time, some investors become worried and some even panic. Avoid reacting to headlines or letting your emotions dictate your decisions. Remember you have long term goals in mind. Investing in a covered call strategy can also help you in mitigating risk.
10. How Many Bear and Bull Markets Have Happened?
The stock market has cycled between bull and bear markets many times over the course of history. A bull market is one where the market goes up 20% or more in value while a bear market is one where the market decreases by 20% or more. An analysis by First Trust Portfolios revealed that from 1926 to 2014, there have been there have been eight bear markets, averaging 1.3 years apiece with an average cumulative total loss of 41% and nine bull markets, averaging 8.5 years apiece with an average cumulative total return of 470%. (For more from this author, see: Choosing the Right IRA Account.)