To many, investing in the stock market can be a painful and costly experience. After all, you run a high risk of potentially losing money as well as feeling out of control of what’s going on with your money. There are simple (and frugal) steps you can take in order to remove the pain from investing and consequentially remove emotions from financial decisions. 5 such steps are listed below:
1) Have A Plan
In my experience and that of others, painful investing comes from not having an investment plan. A realistic plan is important regardless of the amount you are investing. A plan will set out a goal for your investments and it will help you manage your investments better. Actions like growth, income production or a trading strategy to limit losses are some of the ideas you should document in your plan.
2) Play the Market By Using A Virtual Trading Platform.
Why dive in to the deep-end of the stock market when you can gradually learn how the stock market works using virtual money. An easy way to get experience in the market without the pain of true investing is to open a virtual stock market account. Many online brokers offer this service for free, which a frugal person loves. The virtual platforms allow you to test strategies and play the market without the pain of losing money.
3) Don’t Try To Time The Market
Investing charlatans will try to convince you that it’s possible to time the market. While it might be possible to do so every once in a (long) while, it is generally not possible. I find that many people that try to time the market are usually led by their emotions and are making costly decisions that can be painful. By trying to time the market, you miss out on potential gains, capture bigger losses as well as increasing your commission costs which will be a drain on your portfolio.
Rather than timing the market, it is a better idea to use Pound Cost Averaging. Pound cost averaging is putting a set amount of money into your investment vehicle at a determined frequency, say £100 per month. This type of strategy is good during all market conditions. In down markets you’re able to buy more shares and in up markets you’re adding fewer shares to ones already producing capital gains. The benefit of pound cost averaging is that it takes the pain out of deciding how much you can afford each time you put money into the market.
It also takes the pain out of paying a lump sum when the market it at its peak right before a crash. You can also possibly benefit from lower trading costs, because many funds online will lower their fees to attract monthly investors. It is very important to stick with this plan and you should generally only stray away from this strategy if a significant life change dictates it.
4) Diversification Is Your Best Friend.
Don’t put all your eggs in one basket; you’ve probably heard this saying a million times and that just goes to show you how important a diversified portfolio is. Don’t just put all your money in one or two investments; you’ll feel pain as your portfolio will be more vulnerable to wild swings. Diversified portfolios provides downside protection. Sure, you may have a holding or two decline, but that will be smoothed out by other holdings that go up in value. Of course, diversifying does not guarantee not losing value as a whole but it can help lower your investment pain with the confidence that they move independently of each other. The easiest and least costly way to diversify is by using a fund which compromises of equities, bonds and property. It may be hard to find such funds that produce consistent positive returns year on year but one such fund is Nutmeg which I would personally recommend.
5) Keep Cost Of Investing To A Minimum
No one likes to pay more than they should have to, especially someone trying to live frugally. With the plethora of online brokerages, there is no reason why someone should have to pay hundreds of dollars to place a trade. Many brokerages offer commissions of £5 to £12.95. Each one has their own structure that make them different, but they’re all lower than a full service brokerage. The cheapest brokers on the U.K. market are iWeb and YouInvest . The most you should pay for a trade is £11.95 and that is with Hargreaves Lansdown . Although HL is more expensive, it does offer you a vast array of features such as expert analysis and plethora.
If you are able to implement the 5 steps mentioned above, you will be on your way to investing with minimal pain and heartache!