For many people, money is an emotional topic. Fears and worries often influence the way you think about your finances. If you want to grow your wealth by investing in the stock market, you must first face your fears.
Check out: This is how much a $1,000 investment in Ford stock 10 years ago would be worth today
For you: 6 money moves you must make if you want to be like the rich
Jaspreet Singh, host of The Minority Mindset, has some great insights on overcoming fear of the stock market. In a recent YouTube video, he shared his best tips for hesitant investors to overcome their worries. And if you’re already an investor, these facts are still very relevant! Learning is a lifelong pursuit, especially for investors.
Earning passive income doesn’t have to be difficult. You can start this week.
Accept that the stock market can sometimes go completely crazy
Sometimes the stock market looks like a wild thing. As Singh put it, “Crazy things happen.” The Dow rises one day and crashes the next. Individual stocks rise and fall unpredictably. Let’s take Meta as an example: Over the course of a month, the stock’s value fell from $539 to $453. Later, the stock’s value rose again to $521.
The market’s dramatic ups and downs can be, well, scary. Inexperienced investors sometimes get so alarmed by market fluctuations that they dump their stocks rather than wait out the storm. This is a mistake, but a common one.
Even Warren Buffett made this mistake when he first invested. He panicked and sold his stocks after seeing their value drop. The same stocks later rose sharply again and Buffett learned that it is not a good idea to sell stocks because of a momentary change in value.
The conclusion: With experience, investors learn that price declines and crashes are normal and do not indicate a major stock market downturn. Instead of dumping stocks, hold on to them and wait out the downturn.
Learn more: I’m a self-made millionaire: 5 stocks you shouldn’t sell
Build wealth with patience
Singh said the real opportunities in the stock market “only come to people who are truly patient.”
Experienced investors know how to think long-term. The stock market crashes at semi-regular intervals, with 20% declines or “bear markets” occurring roughly every 5.5 years. Over time, however, the top stocks in the market, represented by the S&P 500, have consistently gained. When accounting for inflation, the S&P 500 has risen at a consistent rate between 6.5% and 7%.
In other words, instead of panicking every time the market changes, realize that a certain amount of volatility is perfectly normal and does not mean that something is fundamentally wrong. Smart investors know that they must patiently hold on through dips and crashes rather than selling stocks at a loss.
The conclusion: It takes time and patience to build wealth. Ignore daily market fluctuations, which usually even out over time. Look at the long-term performance of stocks over the years to maximize your gains.
Know what to do in a market downturn
You’ve learned what not to do in a market downturn, so what does Singh think investors should do?
A market downturn is a great opportunity to buy up stocks. Think of a downturn as a time when stocks are on sale. Knowing that their value is likely to rise soon, take advantage of the temporary discount and buy up as many shares as your budget allows.
Many experts, including Warren Buffett, offer similar advice. Buffett once said, “Bad news is an investor’s best friend. It allows you to buy a piece of America’s future at a discounted price.”
The conclusion: Sometimes what seems like bad news turns out to be a hidden opportunity. Don’t be fooled by the gloomy headlines about the stock market: price drops are an excellent time to invest.
Choose the right investment strategy
There are many different approaches to investing in the stock market, and if you don’t have a strong financial background, you may have a hard time figuring out which strategy is right for you.
Singh recommends developing an approach that allows you to play to your strengths. How much time do you have to research individual companies and investment prospects? What is your risk tolerance?
Investing in individual companies is a high-risk, high-reward strategy. If you have the time and financial know-how, this approach can produce high returns, but it can also result in significant losses. For most people, it generally makes more sense to invest in an index fund such as the S&P 500.
The S&P 500 includes the 500 largest companies in the United States and represents a cross-section of several industries. The index is often viewed as an indicator of the performance of the U.S. economy. For this reason, investors often recommend investing in the fund, as betting on the U.S. economy is generally considered a very safe gamble. It also saves investors time and stress that they might otherwise spend researching individual stocks.
The conclusion: Be realistic about your financial knowledge and skills. For the typical investor, an index fund like the S&P 500 is the best approach.
Understand your finances
Singh’s final tip may be the most important of all, as it can potentially save investors a lot of heartache and loss.
Singh advised people to realise that investing means parting with their money for years. So, never invest money that you might need to cover living expenses. Ideally, you should set up three separate bank accounts – one for saving, one for spending and one for investing.
Many investment firms allow their clients to set up an “automatic investment strategy” that allocates a fixed monthly amount to invest. Typically, this approach automatically transfers a fixed amount from your paycheck to your investment account each month.
The goal is to keep your investments separate from your spending and savings accounts while making sure you don’t forget to build your investment portfolio.
The conclusion: Investing in the stock market is a long-term wealth-building strategy. Don’t think of it as a get-rich-quick scheme, as that will leave you vulnerable to market fluctuations. Be patient and think long-term.
More from GOBankingRates
This article originally appeared on GOBankingRates.com: Jaspreet Singh: 5 Things to Know If You’re Scared of Investing
