6 Frugal Ways to Remove the Pain From Investing
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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, like E-trade, 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.
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. One great way to diversify is by effectively establishing your own index fund, like through Motif Investing. With Motif, you can invest in up to 30 stocks or ETFs thereby allowing you to diversify across a number of different holdings for one low cost of $9.95.
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?
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