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Should you be afraid of the stock market?

When the media churns out scaremongering news about trade war fears and big stocks like Facebook losing 20% of their value in a matter of hours, it’s not surprising that only 54% of the U.S. population invest in the stock market.

Just one in three millennials is investing on the stock market. This could be the result of the market collapsing in 2008. Oh, and before that, the internet stock bubble bursting in 2000! 

However, let’s not dwell on hard times. We’re here to reassure you by sharing some important investment tips and tricks to overcome your investment fears.

Face your fears

First and most important, don’t be afraid to invest. There are so many benefits, especially if you’re a millennial. Here are a few important things to keep in mind to overcome your investment fears, and profit from market returns:

Starting early will let you maximize your earnings by compounding interest. Simply put, the more time your money has to generate earnings on an asset’s reinvested earnings, the more powerful your investment potential. 

Einstein called compound interest the eighth wonder of the world because it makes your return greater as time goes by. For instance, if you invest $100 with 5% of annual return, you will have $5 of profit the first year. If you add that to your initial investment, you will be making a profit of 5% of $105 for the second year, instead of just $100, and so on.

Here’s another example – let’s say you get an average annual return of 8% (tax-deferred) on your investments.  if you start investing $500 monthly when you’re 30 years old until retirement at age 65, you’ll have a $1.15 million. (Yikes!) However, if you wait until you’re 40 to get started, you’ll get less than half that amount — $479,000.

(And, if you’d been smart enough to start at 25, well, hats off to you: that extra 5 years brings your total to $1.8 million.)

Stock market fluctuations

Even if financial analysts use over complicated terms, charts and numbers, understanding the stock market isn’t rocket science. In fact, it’s fairly predictable. It will take its fair share of dives, but also recover from them.

Let’s look at the stats between 1965 and 2015. The S&P 500 underwent 27 corrections, but in the end regained its value every single time (just in case you’re wondering, a stock market correction is a price decline of at least 10% of any financial asset or market index.)

So, if your goal is to get rich quickly, then the stock market probably isn’t for you. But if you’re willing to focus on the long term, comfort yourself knowing that over the years the market has spent more time up than down.

Actual losses vs losses on paper

If the value of an asset or security drops, you’re not losing money, it’s just a loss on paper. In fact, you only lose money when you actually sell your investments at a loss, so short-term traders beware.

For instance, if you buy 100 shares of a particular stock for $50 a share and the price drops to $40 a share, then you haven’t lost any money. Rather, the market value of your shares has simply declined. If you were to sell those shares at the current market price of $40, then you’d lose $1,000. 

Therefore, if you’re an informed investor, not a trader, you’ll invest for the long-term to avoid losing money during declines, and you’ll make money once the market recovers, which it’s been shown to do.

The risks if you DON’T invest in stocks

Simply put, if you don’t invest, you’re losing money anyway! But why?

The answer is simple – Inflation. And the only way to protect yourself from inflation is by investing. Inflation increases the money supply (more dollars are printed) and the prices of everything else. Which means the dollar loses its value and its buying power.

Wall Street hype

The media and Wall Street hype stock market volatility because they want you to get emotionally involved. Investors start to panic or get excited, and their response is to trade more. And when investors trade, they pay fees and commissions.

This is how Wall Street makes money, so it makes sense to hype stock market volatility. The more you’re scared, the more likely you are tol trade… and the more money Wall street will make.

Our advice, switch off market noise and invest for the long-term, based on your own research. 

Diversification

Remember that diversifying your portfolio is the way to minimize risk. This means holding different stocks and bonds in different industries or sectors. This can protect you from losing everything if shares dive.

For example, when the Enron stock plummeted, its was the only company to do so. If Enron made up 100% of your portfolio, you would have lost everything. However, if that stock only made up 3% of your portfolio, your portfolio would experience a huge drop, but it would be backed up by its other holdings. That’s why you diversify!

Index funds offer instant diversification and take some of the legwork out of building a portfolio, so investing in them is always a good strategy.

The Takeaway

Just remember not to let your emotions get the better of you. It’s normal to be afraid of investing but you shouldn’t believe everything you read and hear in the media. 

First of all, start investing as soon as you can to get greater returns over time. To minimize market risk, build a diversified portfolio, trust your investments and play for the long-term. 

Oh and last thing, you don’t need a huge amount of capital to start investing. Not even €100. FlexInvest lets you start investing with as little as €1!

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