Investing in the stock market can be a painful experience for many. After all, you run the high risk of the potential loss of money along with feeling out of control of what’s going on with your money. There are simple and frugal ways that you can take the pain out of investing that will help you and remove emotion from your financial decisions. Living frugally requires separating the two, and if done successfully will help you reach your long term goals.
Have a Plan
I find that many times painful investing comes from not having an investment plan. Regardless of the amount of money you’re investing, aid it with a plan. This is a simple process where you record what exactly your goals are for your investments. Whether it be growth, income production or a trading strategy to limit losses these are ideas you should document in your plan.
“Play the Market”
An easy way to get experience in the market without the pain of true investing is to play a stock market game, such as one found here. Many of these offer services for free, which a frugal person loves. Games and paper trading applications from online brokerages allow you to test strategies and play the market without the pain of lost money.
Don’t Try to Time the Market
Investing charlatans will try to convince you that it’s possible to time the market. While it might be possible to do so every once in a long while, it is generally not possible. I find that many people that try to time the market are usually led by their emotions and are making costly decisions that can be painful. By trying to time the market, you miss out on potential gains, capture bigger losses as well as increasing your commission costs which will be a drain on your portfolio.
Dollar Cost Averaging
The idea behind dollar cost averaging is putting a set amount into your investment vehicle at a determined frequency, say $100 per month. Such a strategy is good during all market conditions as in down markets you’re able to buy more shares and in up markets you are adding fewer shares to ones already producing capital gains. The benefit of dollar cost averaging is that it takes the pain out of deciding how much you can afford each time you put money into the market. You can also possibly benefit from lower trading costs, because many mutual fund offered through online brokerages will lower their fees to attract such investors. Keep in mind that you should stick with your plan unless a significant change dictates that you change your strategy.
Diversify
Don’t put all your eggs in one basket. Similarly, don’t put all your money in one or two investments; you’ll feel pain as your portfolio will be more subject to wild swings. Diversified portfolios provides downside protection. Sure, you may have a holding or two decline, but that will be smoothed out by other holdings that go up in value. Of course, diversifying does not guarantee not losing value as a whole but it can help lower your investment pain with the confidence that they move independently of each other.
Cut the Costs on Your Investing
No one likes to pay more than they should have to, especially someone trying to live frugally. With the plethora of online brokerages, there is no reason why someone should have to pay hundreds of dollars to place a trade. Many brokerages offer commissions of $3 to $10. Each one has their own structure that make them different, but they’re all lower than a full service brokerage. Additionally, the following practices could aid in lowering of costs:
- Free ETF programs offered at many online brokerages
- Low cost index funds
- Free trades for opening a new account
- Decrease in number of trades placed
Pain is a common emotion when speaking of the stock market. There are a number of frugal ways this pain can be reduced that can help improve your investment experience and benefit your portfolio for years to come.
What are some of the things that cause you pain in investing?
Photo courtesy of: Steve Knight
Hi John,
Great tips. I’m learning as much as I can so I can start to invest on my own. Thank s for the link to the game.. heck they give you a million bucks when you sign up.. wish life was that easy! Cheers Mr.CBB
Canadianbudgetbinder recently posted..Straight Talk About Fees and Penalties on Mutual Funds
Thanks. I too wish life were that easy…then I’d have my whole family sign up.
Seriously though, great job on learning what you can. That is key when you’re investing.
Great tips! I wish I just had more time to follow them. I have to put most of my stuff on auto-pilot…just because I am so busy!
Great post!
Holly@ClubThrifty recently posted..Voluntary Torture: A Trip to Our Local Shopping Mall
Auto-pilot can be good, especially if you don’t have the time and if you’re making sure to look at how they are performing from time to time.
We don’t have much pain in investing as I’m an investment advisor.
We follow a lot of the rules that you discuss and I love playing the stock market game! I had an economics class in high school and we played the market all year long…it was a blast!
Jason recently posted..Stop Buying the Hype: The Average Rate of Return isn’t What You Really Earn
I bet not Jason.
I remember playing that game as well in high school. I remember just picking companies because of their name. I wish investing was that easy in real life.
One of the biggest pains that I have is when I have an investment idea and I decide to pass on it. They weeks or months later I see it come true and all of the lost income opportunity.
Sean @ One Smart Dollar recently posted..Personal Finance Week in Review for September 23
I know that feeling Sean. I made that mistake a few weeks ago when I held on to something for a bit too long and lost out on several thousand dollars as a result, not the best of decisions in my book. Perhaps it will make for a good blog post though.
Dollar cost averaging makes the pain go away. Actually the biggest pain would be from not investing and getting to retirement with too little.
Kim@Eyesonthedollar recently posted..Does LASIK Surgery Make Financial Sense?
I love dollar cost averaging. Great point on having too little from retirement, I completely agree.
I mix dollar cost averaging and index, every month a set amount goes only towards index funds. I used to max out the UK stock and shares savings account every year at the beginning of the tax year, but realized that funds were more expensive because many people did the same, so now I do it monthly. I have seen to many articles about managed funds not being able to beat repeatedly the market, so I feel safe with index funds.
Pauline recently posted..How to make your own sushi
Great for you Pauline. I would tend to agree that Index funds are a great way to invest as well as keep the costs down vs a managed fund.
Great tips! I personally really like my 401k because it continues to grow regardless of the market. With bi-weekly automatic withdrawals from my paycheck, I don’t even have to think about it. I do check the balance once in a while, but rarely do I look at how it has performed since I have little control over it.
DC @ Young Adult Money recently posted..5 Great Real Estate and Home Renovation Shows
Thanks DC. I love 401k’s for that exact reason. I also like how more companies are just putting money into target dated funds for employees if they do nothing with the plans as a way to force them to save.
Good tips, these make a lot of sense. Personally, I like to invest my after tax dollars in real estate and some other passive income type investments. But I definitely employ all of these tips with my 401k, Roth IRA and HSA. It’s definitely important to have a plan and stick with it. People lose a lot of money when they get nervous and sell their investments instead of holding on. The market is cyclical, but it should revert to the mean.
Harry @ PF Pro recently posted..Guest Post: Intelligent Deductions, Why is the US Government Giving Tax Breaks to People Who Don’t Need Them?
I agree Harry that people do get nervous and sell their investments before they should & that’s why an investment plan is key. That’s awesome you invest in real estate and other passive income producers. That can provide a good source of income and diversification at the same time.
For the last six months, I have been watching as some of my stocks took a plunge way too deep, and show no sign of improving. I keep my anxiety tightly in control or I might just sell them at their present rates. Actually my plan is to sit on these stocks for 10 years, so there is really no need to sell at this point. It’s just that I can monitor the status online and this makes me nervous.
CreditDonkey recently posted..Shoppers Feel Safer Shopping Online than at Local Stores
Keeping anxiety in control is key to making a good investment decision. Too many times, myself included, allow it to get the best of us and end up only making a foolish decision. Thanks for stopping by!
This is a good post. I like how you mention “playing the market” first to get experience. Also, play money is play money so at least you will not do any financial harm while you learn.
Bill recently posted..How to Budget A Raise Like a Genius
Exactly Bill. I really like doing paper trading if there’s a strategy I am looking to do, but want to test it out before I jump in with my own money.
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Agree with the Cut the Costs on Your Investing portion and DCA can work – if you are buying low cost ETFs and index funds. I simply disagree with the Play the Market portion. Games cannot prepare you for 1987 or 2008.
Carlos Sera recently posted..Newly Released Tale – A Transformative Tale
I would agree Carlos that is a good way to cut costs by being in low cost funds.
However, my point in the post was not how to prepare for major market declines…but getting the discipline of investing down. That is why I included the paper money section as it allows people to try out different strategies or invest in different things before they put real skin in the game.
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Dollar cost averaging is a good method if the company has strong financial fundamentals and good profit prospects. There is little monetary benefit from buying more shares of a company that will not experience an eventual rise in price per share. Moreover, the net worth of an investment made via dollar cost averaging will decline if share price falls, and despite owning more shares.
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