Monday, September 21, 2009

An answer to a question about investing

A question from @lastmojican on Twitter:
What are your thoughts about investing in the stock market? I want to invest but I have lost faith knowing that greed and ignorance created this problem. How do we trust again?
Great question.

I understand your fear about being in the stock market right now. The simple answer to your question is in the question itself: "greed and ignorance created this problem." How do you combat greed and ignorance in investing? You do so with knowledge that informs a well-crafted plan focused on your own goals rather than simply the accumulation of more.

The truth about what happened in the meltdown is that many people jumped into investments they didn't understand. And you're right, they did so out of greed. The unfortunate part is that all of us suffered to some extent because of that greed.

The silver lining, though, is that on the other side of a stock market drop is essentially a fire sale. Just like when your favorite store has a clearance, prices on shares of many solid companies and funds are well below where they should be. That means investors can buy more and make steady gains, especially if you follow dollar-cost averaging strategy (which just means you invest a specific amount at regular intervals over a given amount of time).

The most important thing to remember is that investing is not gambling. Many novice investors make the mistake of letting the word "investing" conjure up the image of some guy locked in his home office, risking his kid's tuition money trying to time the market. Before you dive in, arm yourself with as much knowledge as you can about the basics of investing by going to the library and checking out something as simple as "Investing for Dummies". There are all kinds of resources out there to help novices become literate about investing and the more literate you become, the more confident you'll be. Take your time and take it slow.

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