Money & Career
Riding the Waves: Understanding the Stock Market and How to Avoid Investment Mistakes
1/1/2020 1:00:00 PM

Riding the Waves


Investing can be an intimidating business. It’s certainly a smart move, but even successful investors admit it took time to feel comfortable in their stock-market shoes.


Part of that intimidation is confusion about the workings of the stock market. There’s a lot of unfamiliar terminology and acronyms associated with the stock market, and everyone knows investing comes with a certain level of risk.


"Investing is simultaneously simple and complicated,” says Denise Rau, CFP, owner Rau Financial Group. "There are some beginners who think they can master the market like a well-seasoned Wall Street broker, and there are others who are so wrapped up in the complexities of investing that they are afraid to get started.”


At the simplest level of explanation, Rau says the stock market is where investors can buy and sell securities, or investments, such as stocks, bonds, mutual funds, exchange-traded funds (ETFs) and cash equivalents like Treasury securities. "There are quite a few ways you can invest in the stock market. This depends on several factors, including your time frame, goals, comfort level and tolerance for risk,” she explains. For instance, if you have more time to invest, and have a high comfort level with risk, your approach could be more on the aggressive side. Conversely, if you’re older and have less time to invest in the stock market before retirement, and aren’t as comfortable with risk, your approach will likely be more conservative.


Some people invest on their own, while others invest through their employer-offered plan or seek the advice of a financial advisor. "An experienced financial advisor can help you learn about investing, work with you to determine your financial goals and put a plan in place to help you achieve them,” says Rau. "It’s a great way to get started with investing.”


Regardless of which path you take to investing, Rau says there are several common missteps you should avoid: 


Waiting too long. 

One misconception of investing is that you need a lot of money to do it. That’s simply not true, Rau says. You can invest even the smallest amount—a few hundred dollars—to get started. "It’s important to invest when you’re young, because you’re able to take more risks, and more risks can potentially lead to greater profit. Unfortunately, many young people decide to wait until they have ‘enough money,’ yet it’s unclear what that means. You will have new expenses again and again, such as college, house, kids, car, etc. If you wait until you think you have enough, you may never truly get there. Start young and start small.” And although it’s more beneficial to start when you’re younger, that doesn’t mean you can’t invest when you’re older, Rau notes. It just means you won’t be able to make the riskier investments that have the potential to provide better returns over time.


Focusing only on the money. 

Focus on investments that mean something to you, not just the ones you think will make the most money. "The return on investment is an important deciding factor. But it isn’t the only factor,” Rau says. "I encourage clients to consider investments in which they are personally, as well as financially invested. You’re more likely to understand what’s happening with your investments if you’re already following companies you care about.”


Having unrealistic expectations. 

If you want to invest so you can "get rich quick,” then you don’t have a realistic view of how the market works, Rau says. "Investing takes time and patience. If someone promises that you’ll get rich on a certain investment in a short amount of time, approach that investment with caution. No one ever truly knows if an investment will hit or miss.”


Not diversifying. 

Rau says the cliché, "Don’t put all your eggs in one basket,” applies to investing. Diversification can help shield your investments against risk. Diversification means having different types of investments that respond differently to market influences. "True diversification isn’t just about having a bunch of different types of investments in different accounts,” explains Rau. "You’ll want to have a good mix of asset classes, such as stocks, bonds, and cash equivalents. Stocks are typically higher risk but have the potential for higher gains, and bonds are lower risk but also have lower gains. Because investments in different asset classes will behave differently, your portfolio is more likely to stay predictable when you diversify. 


Obsessively checking the market. 

"I’ve seen many investors who follow the market to an almost compulsive degree,” Rau says. "That leads to unnecessary stress. It’s important to understand that the market is fluid, constantly fluctuating. When it comes to investing, think marathon, not sprint.


To become a successful investor, you need a long-term plan. Hourly or daily changes in the market shouldn’t change that. Instead, pay attention to patterns over time. That’s another way a financial planner can help.”


Rau Financial Group offers an extensive range of financial services, including financial planning, investments, retirement planning, trust services, real estate investment and insurance products. For more information, call (337) 480-3835 or visit www.raufinancialgroup.com. 


Securities offered through LPL Financial.  Member FINRA/SIPC.  Investment advice offered through GWM Advisors, a registered investment advisor.  GWM Advisors and Rau Financial Group are separate entities from LPL Financial.


Posted by: Kristy Armand | Submit comment | Tell a friend

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