Financial Friday #148: Are you Scared of the Stock Market?

With prices of food and other necessities spiking in 2022, using any extra money to stuff your pantry rather than saving and investing would have been a wise move! Had you invested in a barrel of vegetable oil and a few cases of Cheerios instead of mutual funds back in March of 2022, you would likely be up 30% instead of down by 10%!
You could have also hoarded your cash. Although you would have lost to inflation, you would have fared better than the average returns offered by most financial markets. Almost all of the major stock indexes were decidedly negative in 2022.

However, if you regularly peruse the market update each week in this newsletter (scroll down!) you would know that in 2023, stocks have been chipping away at the losses they racked up in 2022. We don’t have a crystal ball on whether that trend will continue and this week has been a sea of red, but investing in the financial markets has proven over the years to be a key ingredient to building wealth.

For most newbie investors, the biggest hurdle is the age-old question “what if stocks go down?”. The answer is they do, and yours may too, but there are ways to mitigate that risk. Whether you win or lose depends greatly on which stocks or funds you are holding, but also on your investing timeline. You have to ask yourself, are you investing for the next 10 minutes or the next 10 years? Historical market returns show that you usually do quite well over a ten-year period.
If you are on the outside wondering how to get started in stocks, here are three of the most common questions we get from would-be investors.

How do I pick stocks?
The short answer is you don’t have to (and probably shouldn't) rely on picking stocks! Even if you had the time and knowledge to investigate and evaluate potential companies to invest in, your chances of picking winners with any sort of consistency is very low. Holding a limited number of individual stocks is also a risky strategy. A more sensible approach is to choose a diversified bundle of stocks made up of companies across many industries which will help to lower your overall risk.
The great news is that there are thousands of these bundles of stocks already pre-picked for you by teams of financial experts using all sorts of advanced analysis and inputs that an individual investor could never replicate. These bundles are called index funds and there are a number of variations - some try to emulate the return of an entire market like the Toronto Stock Exchange, while others focus on a specific industry or geographic sector.

Nothing will completely eliminate risk, but in general, broad-based index funds are less volatile and a great option when it comes time for new investors to decide what to buy.

Do I need a financial advisor or stockbroker?
Traditionally, a stockbroker was the only option to facilitate the purchase of shares. Nowadays, there are plenty of online brokerages that anyone can use to set up a trading account and easily purchase individual shares and many types of index funds. Whether you need a stockbroker or some other kind of advisor (we recommend a financial coach) to help you depends on whether you want to take the time an effort to learn how to handle it yourself.
Lots of Canadians successfully manage their own investments through online brokerages and save themselves a ton of money in fees and charges. Automated investment platforms (robo-advisors) and all-in-one ETFs are popular options because they don’t require much financial knowledge, allow for easy risk management, and are simple to use with relatively low fees.

When is a good time to buy stocks?
If you had nerves of steel and a crystal ball and entered the market in March of 2020 (when the pandemic was raging) you would be doing extremely well in March of 2023 — the TSX index is up around 80% from that time. The problem is that fluctuations like that don’t happen often and choosing the right time is always going to be very hit and miss. Rather than focus on trying to nail the timing of your entry (or exit) from the market, you should be looking at your investment horizon.
The longer you leave your money in the market, the higher the chance that you will come out ahead of the game. You can always ramp up the risk of your holdings if you have a longer investment time frame and are aiming for higher returns, but trying to capitalize on short-term market fluctuations by jumping in and out of the market is a difficult strategy at best.

Resources:

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