Everywhere you turn, it seems like someone is telling you to invest. More specifically, that you should invest in the stock market and that it’s the only way to achieve financial success.
However, financial success is a subjective, personal thing. There are times and situations when the stock market may not be the right fit for a person, such as the six situations noted below.
1. You Have Debt
If you have debt, particularly high-interest debt, no matter how much you invest, you’re unlikely to earn more than you owe. The reason for this is that interest rates for debt, even lower-interest debt such as student loans, are often higher than the interest you’d earn from investing.
This is particularly the case for credit card debt, where it’s not uncommon for annual rates to exceed 20%. Investing in the stock market typically yields 10% interest or dividends, but even then, this isn’t guaranteed. Because of the rate differences, it’s better for your financial plan to pay off debt before you start investing.
2. You Don’t Have a Financial Plan
Without a financial plan, knowing how to approach investing in the stock market is difficult. Taking the time to map out a plan is an important first step. Consider your current financial situation, plan out your short- and long-term goals, and the strategies you’ll implement to reach them, keeping in mind that there are more investment options than just the stock market.
Once you have a plan, you can move more intentionally into stock market investments based on your goals.
3. You Don’t Have the Funds
If you’re living pay cheque to pay cheque or have just started earning enough to save, it is generally a better idea to develop an emergency savings fund than to begin investing in stocks. In addition to this, if you know you’ll need the money you’re considering investing within the next few years, it’s best not to invest in the stock market as it is too volatile over such a short period to be beneficial.
4. You Don’t Understand the Market or How to Invest
Many strategies and methods exist when investing in the stock market. Purchasing mutual funds is a common approach, but even with this, there are different factors to consider. Among these factors are what types of businesses are in the fund and whether to get a high-risk, potentially high-reward portfolio or a low-risk, low-reward one.
To navigate these complexities, sitting down with a financial advisor can help to make sense of the market, trading, and overall portfolio options.
If you don’t have room in your budget for a financial advisor, there are many robo-advisors available to help you establish yourself in the market at a lower cost. The best part about robo-advisors is that you don’t have to invest a lot to try them. Just as you might play for free in demo mode at Slots Temple before placing a bid, you can test the stock market waters with the minimum investment required, which in some cases is as little as $1.
5. You Don’t Have the Time
Time is an important consideration in two ways. The first is having the time to learn about the stock market and make investments. The second is the time frame for meeting your investment goals.
The first is slightly easier to manage than the second. By allocating some time each day or week, you can grasp the fundamentals of investing in stocks and the best methods to use. (Of course, depending on your situation, this can be far more easily said than done.) Not having enough time is a significant challenge when considering how long you have to invest in a goal.
When investing in stocks, time is an essential factor in gaining returns; the longer the investment period, the better the returns. For this reason, if you have the goal of buying a home in the next two years, investing in stocks is unlikely to be the best financial strategy. Investing in stocks is best for your long-term financial goals, like retirement or building an education fund for your children.
6. You’re Not Comfortable With the Risk
Even if you haven’t researched stock markets, you’ve more than likely heard that investing in them comes with risk. While it’s true that there are risks, this Vox article makes an important point worth considering: “Recognise there are risks in investing — and in sitting it out.”
For the risk-averse, the rises and falls of the stock market may feel too uncertain to invest in. If this is the case for you, take the time to understand what investing in stocks versus not investing in stocks will entail. Explore investment strategies that will make you feel confident and comfortable with your investments, which may involve little to no stocks in your portfolio.
Conclusion
To know whether or not stock markets are the right fit for you, it is essential to assess your financial situation and goals — as the stock market isn’t the ideal investment for every situation or goal.
Before considering investing in stocks, address financial constraints like debt with a financial plan, develop concrete goals, and then take the time to understand how the stock market works and how to invest in it effectively. Once you have this knowledge and a plan, you’ll be able to make the right financial moves for your situation — which might involve investing in stock markets or avoiding stock investments altogether.