Investing in stocks is one of the best ways to build wealth over time, since on average, the stock market returns 9% per year. But there are many instances when buying stocks might not make sense. If you're on the fence about whether to enter the stock market, ask yourself if any of these apply to you.
1. You're About to Retire
If you are right on the cusp of retirement and need to rely on your savings when you stop working, it's best to avoid riskier stocks and place it in safer investments, such as bonds or cash. Most experts recommend that bonds and safer investments should comprise the same percentage of your portfolio as your age. So, a 65-year-old investor would want about 65% of their portfolio in bonds and lower-risk investments, and only 35% in stocks (which tend to be higher-risk). The last thing you want is for your nest egg to rapidly decline in size right as you plan to dip into it.
2. You Need the Money Right Away
Investing in stocks isn't really for people looking to make a quick buck. Sure, you might make 10% in one month, but you might also lose just as much. If this is cash you need soon for a new car, down payment on a home, or a new child, you're best off keeping it somewhere safer and more liquid.
3. You Haven't Researched the Most Tax-Advantaged Ways to Invest
It's relatively easy to buy individual stocks, but have you explored buying these via tax-advantaged accounts, such as a Roth IRAs and 401(k)s? If not, you may find yourself owning stocks in regular brokerage accounts, meaning you'll be on the hook right away for any taxes on dividends and capital gains. Do a little bit of homework on tax-advantaged vehicles before you invest, and you'll end up saving thousands of dollars in the long run.
4. You Don't Have an Emergency Fund
Investing in stocks is a great way to build wealth, but it doesn't really make sense to put money in the markets if you have no cash savings. Before you invest, work to ensure that you have enough liquid savings to cover at least three months of expenses, so that you're not financially crippled by a job loss, major medical expense, or other crisis.
5. You Freak Out Over Market Fluctuations
It's a simple fact that markets go up and down. There may be days you'll lose hundreds — or even thousands of dollars. Can you stomach this? If you're losing sleep over a single day's losses, perhaps you're not ready for stock investing. Before jumping in, take some time to get acquainted with the movement of markets. Becoming comfortable with the ups and downs will make you a more patient and happier investor.
6. You Can Only Invest a Very Small Amount at a Time
When you buy and sell stocks, you will usually pay a commission on each trade. This costs less than $10 at most discount brokerage firms, but if you only plan to buy a few shares of stock, that could add up to a big chunk of your return. Generally speaking, it's more efficient to buy larger quantities of shares, if you can. (There are some caveats to this. Many brokerage firms offer commission-free trades on many investments, so it's possible to buy small numbers of shares. But your choices are limited.)
7. You Have a Lot of High-Interest Debt
If you have thousands of dollars in credit card debt and are paying 13% in interest, is it wise to place your money in stocks? Sure, there may be stretches of time where investment returns are higher than your interest rates, but most of the time you are better off using money to pay down debt. In the long run, eliminating debt will free up more money to invest, putting you in better financial shape.
8. Stock Valuations Are Completely Insane
I am not a believer that you should always "sell high" and "buy low." If you are investing for the long haul, it's not worth stressing over whether you're getting into the markets at the right time. Young investors, in particular, are best off just getting started as soon as they can. That being said, there may be instances when there is broad agreement that stocks are overpriced based on a company's earnings, or other factors. In these cases, it might make sense to wait for the market to cool a bit before pouncing. Pay close attention to things like a company's price-to-earnings ratio, and how close a stock price is to a 52-week high.
9. Interest Rates Start Shooting Way Up
Right now, interest rates are still historically quite low, but there have been instances when interest rates were so high that you'd end up with better returns from your savings account than the S&P 500. If economic conditions suggest interest rates might rise dramatically, it might make sense to hold off on investing in stocks. It's worth noting, however, that interest rates have been quite low for many years now, and that past predictions of rate jumps didn't materialize.
10. You Really Have No Idea
It may seem like everyone is telling you to invest. But you just have no idea how to get started or what to do. That's okay! If you're unfamiliar with investing, you're more likely to make a mistake that will cost you money. Ignore outside pressure and take the time to learn about the stock market and the mechanics of investing before putting your money at risk.
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Have there been other occasions in which stocks weren't the right choice for you?