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3 Things to Do Before You Invest in the Stock Market

3 Things to Do Before You Invest in the Stock Market

If you think stock market investing is just for experienced investors or people with lots of money, it’s time to think again. Investing in the stock market is not only one of the most effective ways to create long-term wealth and ensure a well-balanced and diversified investment portfolio, it’s also more accessible than ever thanks to recent developments such as online brokerages and no-fee investing options.

That said, it’s still important not to plunge into stock market investing without first doing your homework. In order to make the most of your stock market investments and set yourself up for success, there are a few things you should do first. Here are three of them:

1. Figure out your investment goals.

Although it’s fair to say that the ultimate goal of stock market investing is simply to help you earn more money, it’s a good idea to get more specific when it comes to your personal investment strategy. People invest in different ways for different reasons, and it’s difficult to determine which investing approach will suit your specific needs and situation if you don’t have a clear idea of why you’re investing. To clarify your investment goals, it can be helpful to think about the following questions:

What am I saving for?

This question lies at the heart of your investment style, and it plays a major role in guiding you towards (or away from) particular types of investments. Are you specifically saving for retirement? Are you working towards a major purchase like a home or a car, or a major expense like a child’s education? Are you simply wanting to grow your overall wealth? The process of investing works differently for each of these scenarios, so the deeper you can drill down into the purpose you want your investment returns to serve, the better informed your investing choices can be.

What is my risk tolerance?

The question of how much investment risk you’re willing to accept is a very personal one. Some people have no concerns about trading higher risks for potentially greater rewards; others feel more comfortable knowing that their wealth is growing slowly, but steadily. There is nothing wrong with either approach. The most important thing to understand is that each has its own pros and cons and will be better suited to different investment goals.

How much time do I want to devote to managing my investments?

Stock market investing has plenty of options for hands-on and hands-off investors alike. Again, as with the matter of risk tolerance, the question of how much time you want to spend directly dealing with your investments depends on your personal preferences and situation.

2. Take care of high-interest debt.

After you’ve thought about why you want to invest in the stock market, the next question you’ll be faced with is how much you want to invest. However, before you can properly answer this question, there’s something important you’ll need to do: pay off any high-interest debt you’re carrying. Specifically, you’ll want to target credit card debt, or any other debt with an interest rate of 10 percent or higher.

The reasoning behind this is simple. According to historical, long-term averages, the stock market delivers a return on investment of around 10 percent. If you then have to turn around and pay that same level of interest on your debt, it essentially neutralizes the effect of your investments.

Remember that when you invest, compound interest works in your favor, but it works against you when it comes to debt, so an important early step in your stock market investing journey is to pay off high-interest debt as quickly as possible.

3. Set up an emergency fund.

As previously mentioned, the stock market offers an excellent opportunity to build wealth over time. However, it’s important not to forget that, even though the stock market historically has always yielded positive long-term returns, it can be extremely volatile in the short term.

For example, as the COVID-19 pandemic took hold in early 2020, the market plunged by more than 40 percent, but just a few months later, it had rebounded to an all-time high. As a stock market investor, this means that you shouldn’t be counting on your investments to cover any unexpected expenses because their value can vary dramatically from one month, one week, or even one day to the next. Indeed, some experts even go so far as to recommend that you don’t put any money you think you might need within the next five years into stock market investments.

This is where your emergency fund comes in. Before you start investing, set aside enough money to see you through an unforeseen situation such as a job loss, medical bills, or major car problems. This will help give you the peace of mind you need to create and pursue a long-term investment strategy, as you’ll know your short-term needs will be taken care of.

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