In our previous article, we presented 6 Reasons Why The Stock Market Is The Best Investment you can make. However, we mentioned that there are legitimate reasons where investing in the stock market is a bad idea.
If you can relate to even just one of these reasons, it’s probably better to avoid the stock market and, perhaps put your money in another type of investment instead.
So, what are these reasons and what should you do if you can relate to it? Read on below!
Reason #1: You Want Quick Gains
The cool thing about the stock market is that, not only is it easy to profit from, but the profits are almost guaranteed over the long-term (at least 10 years). Long-term investing coupled with following the proper ways of picking which stocks to invest in will enable you to get good profits at little risks.
In the previous article, I’ve already shown charts of stock markets from different countries and you can clearly see that stock markets always increase in value over the long-term.
However, over the short-term (meaning only days, weeks or just months at most), the stock market is just too unpredictable. It goes up then it goes down… and up again and down again… and the cycle repeats for some time before finally going up by a huge amount. Then it goes back to the cycle of ups and downs.
There is no way to reliably predict if a stock is actually going to go up in a matter of days or weeks or even months. Not even advanced computer programs can accurately predict a stock’s movement over the short-term.
There are people who have earned money by buying and selling stocks over the short-term. We call them traders. Most traders I know have lost more money compared to the money they gained.
The worst case I know of lost over P1,000,000 in a span of only 1 year doing trading! He had studies well, had a structured plan and even had advanced software to help him. Even with all that, he was still no match for the stock market’s short-term volatility.
When I said the stock market is safe and your gains are essentially secured, that is only true if you’re an investor. That is not true if you are a trader.
- Buy and sell; short-term
- Decisions are based on news, rumors, price movement
- Very high risk, good returns if done well
- Difficult to do
- Always looking at stocks; time consuming
- Higher fees from frequent buy and sell
- Buy and hold; long-term
- Decisions are based on facts & business performance
- Low risk , high returns
- Easy to do
- Spends only few minutes a month looking at stocks
- Low fees due to infrequent transactions
What should you do instead?
Ask yourself “Do I really need quick money?”
If you answer “Yes, I need money quickly”, then stock market investing is not for you as it is not for quick money. If you find a quick money scheme, be cautious that it’s not a scam, because quick money usually is. You’ll probably be better off looking for a reputable part-time job to get more cash.
For retirees who need cash every month, instead of the stock market, you’ll probably do better investing on bonds/bond funds, and maybe real estate or REITs as well. My guides on those are coming soon!
If you answer “No, I do not need quick money”, then you should consider being a long-term investor instead in the stock market, NOT a trader. I will be making future posts about how to be a successful long-term investor, especially in the stock market, so please look forward to it!
Reason #2: You’re Not Financially Stable Yet
Some people get so excited, maybe even too excited, over the possibility of making huge amounts of cash in the stock market.
They hear about Bo Sanchez’s maid that maid that became a millionaire investing only about 2,500 per month in the Philippine Stock Market. They hear about their neighbor that was able to afford a huge mansion with a pool using their stock market gains. They might also have a friend that retired early because they already made huge amounts with their stock investments.
Stocks are great investments but that doesn’t mean you should invest in them immediately!
There are steps you need to take first. Like determining if you actually have extra cash per month that you can invest, setting up an emergency fund and paying the debts that you have. Settling these items first before investing makes sure that you will not face unnecessary difficulties in managing your investments.
If you don’t have any emergency funds, for example, then you might be forced to sell your investments when emergencies come knocking at the door. This will be especially terrible if you’re investments are currently in a temporary loss!
So, make sure to stabilize your finances before you start investing.
What should you do instead?
We made a simple guide on the 7 Easy Steps To Financial Freedom And Wealth, where investing is step 5. It might take time until you’re able to finally invest your hard-earned cash, but trust me, you’ll thank yourself in the future for following the steps to financial freedom properly!
Reason #3: You’re Too Worried About Your Investments
It’s unfortunate, but people like this do exist. If you can relate to this, it’s not your fault, but you have to understand that maybe the stock market is not for you.
I want you to imagine that you have invested a large amount of cash to the stock market. Maybe 100,000, maybe 1,000,000. You decide what is a “large amount”. But then one day, the stock market crashed and you see your investments have gone down and your broker reports that you have a 60% LOSS on your investments.
Can you sleep at night if you were in that scenario?
If you answered “Yes, I can still sleep well!”, then congratulations, the stock market is definitely for you!
I’ve said this many times: those losses are temporary. As long as you stay invested and follow our other advice, the stock market will slowly go up again where your investment LOSS will slowly go down until it becomes a GAIN again. We have already talked about this in our Reasons Why The Stock Market Is the Best Investment.
If you look at 10-year and 20-year progress of any stock market, you’ll see that it most definitely has increased over those time periods. In fact, there was once a study that showed that no investor has lost money if they stay invested for 20 years!
If you answered “No, I can’t sleep in that case. I see the historical evidence that says that my investments will recover, but I still feel very nervous! Too nervous to sleep!”, then unfortunately, the stock market would probably be a bad idea as your investment vehicle.
What should you do instead?
You should still invest, but perhaps not in investments related to the stock market. My recommendations would be bonds or bond funds (or other interest-bearing investments) as they are safer than stocks, though they have a lot less income potential.
Most banks will have these as part of their products so go inquire to banks near you or use the internet to get information as to which banks offer these products.
You can also try investing in real estate instead, if you have the capital to do so. Just make sure to learn about the proper way to do it before actually purchasing properties. We’ll have guides on proper real estate investing soon, so make sure to follow us on Facebook and Twitter, and join our mailing list as well.
If you really want to invest in the stock market because your logical brain is telling you that you have to, even when your nervous heart says not to, then you have the option to divide your money between stocks and bonds/bond funds (or other interest-bearing investments).
Perhaps your money will be invested in 50% to stocks and 50% to bonds/bond funds? Or maybe 70% and 30% to your choice of stocks at a higher percentage, or stocks at the lower percentage. You get to decide!
The point here is that since your investments are not 100% in stocks, you’ll probably sleep better at night knowing that you have money in bonds/bond funds as well!
Reason #4: You Don’t Know Enough About The Stock Market
If you don’t know enough about an investment, you shouldn’t be investing on it. This applies to stocks, just as much as it applies to REITs, real estate, bonds, funds, time deposits and any other possible investment.
This is extremely obvious, isn’t it? The fastest way to lose money is to put it in investments you don’t have knowledge on.
The most fundamental questions you need to ask before putting your money on an investment would be the following:
- How does this investment make money? (Or How does this investment work?)
- How much gain should I expect from this investment?
- How long does it take to get the profits?
- How risky is this investment, and am I alright with those risks?
- Does this investment match my goals?
If you can’t answer these questions, then you’re probably not ready to invest yet.
What should you do instead?
If you can’t answer the questions above just yet in regards to stock market investing, then you’re obviously not ready.
That’s fine though! You’re actually already in the right track just by being curious and interested in investing.
Of course, the solution is simple. All you have to do is gain more knowledge about the stock market.
And that’s why we are here in Baku Finance. We’ll be writing blog posts that will enable you to get the correct knowledge about personal finance and investments.
We’ll answer those questions in the future in regards to stock market investing, but also with other investments as well. We’ll talk about real estate, REITS, mutual funds, time deposits and many more.
So, if you haven’t already, make sure to like us on Facebook and Twitter, and also join our mailing list. Don’t miss our posts to make sure you get the proper investing knowledge that you need, for free!
Are you ready to invest in the stock market?
So, did you relate to any one of these reasons or not? Again, it’s alright if you did! We provided some alternatives as to what to do if you can’t invest in the stock market yet.
But what if you didn’t relate to any of these reasons? Does that mean you should start investing in the stock market? Perhaps.
You could start investing to get some experience, but also make sure you don’t stop learning all you can. The best protection against investment losses is knowledge.
Good luck, and I hope you learned something!