Big swings in the stock market are supposed to drive investors away. But great volatility in stock prices can be attractive to certain types of daredevil investors, who see short-term opportunity in a particular stock’s plunging and soaring roller-coaster ride. The recent frenzy over the GameStop “short squeeze,” during which hedge funds were shorting the video game retailer’s stock, betting it would go down in value, while hordes of amateur investors drove the stock to unsustainable highs, leading to a loud crash, is just the latest example of how perilous the ride can be.
Fortunately, investing doesn’t have to be like a trip to the craps table, with your entire future hanging on luck or hunches. Experts urge novice investors to take a few simple steps to protect themselves, minimize their risks and manage their own expectations. Here are some of the best tips we’ve found for a rational, relatively safe approach to investing in unpredictable times.
What are your goals?
Before setting up any kind of trading account, you should have a clear idea of what you’re trying to accomplish. Are you hoping to build a nest egg for retirement? A college fund for your children? Extra cash for vacations or luxury items? Figuring out what you hope to achieve is essential in determining what sort of portfolio will be most likely to get you there. For example, if you’re building wealth for retirement, you’re probably looking at a much longer period of investment and should be considering products that provide steady growth and/or income over time, as opposed to short-term investments.
What is your risk profile?
Your tolerance for risk isn’t just a matter of personal preference. It should involve a candid appraisal of your resources and whether you are in a strong enough financial position to endure losses as well as gains. High-risk, speculative investments (see GameStop) should be avoided unless you fully understand the dangers involved and don’t mind taking a chance on seeing your stake evaporate. Investors who are in it for the long haul should stick to more conservative options, such as index funds and other products with a proven track record.
Diversify for protection.
No single type of investment or market sector is impervious to downturns and recessions. Your best bet for riding out the bad times is to spread out, with a mix of stocks, bonds, mutual funds, and even tamer options, such as certificates of deposit, in your portfolio. They won’t all earn spectacular returns in boom times, but they won’t all collapse in a sudden market reversal, either.
How hands-on do you want to be?
Some investors are keen on micro-managing, checking their accounts daily and tweaking them as they see fit. While that strategy can help you correct the “balance” of your investments in a timely way, it can also lead to unnecessary losses that come from trying to anticipate daily fluctuations, rather than simply holding steady through times of minor turbulence. Other investors may feel more comfortable putting their fate in the hands of a trusted financial advisor or even a robo-advisor. Deciding what level of involvement you want in the day-to-day management of your investments can go a long way toward avoiding frustration and insomnia down the line.
Understand and minimize your fees.
Many people never bother to educate themselves about the fees associated with their investments, but they can add up over time. As we’ve pointed out in previous posts, the difference between what one 401 (k) plan charges in expenses and another can amount to hundreds of thousands of dollars’ difference in earnings over the lifetime of the plan. Read the disclosures provided concerning recordkeeping, administrative and management fees, and consider passively managed funds that charge less than actively managed ones.
Know your rights.
Be wary of high-pressure sales tactics and “can’t lose” stock tips from telephone solicitors or Internet promoters. It’s a good idea to check out any securities brokerage firm before you invest by using the “broker check” feature on the website of the Financial Industry Regulatory Authority. Federal law prohibits making deceptive statements in connection with the sale of any security; that includes not only false statements but omitting key facts about an investment. Penalties for securities fraud can range from criminal prosecution to steep fines to the pursuit of civil damages by investors who suffered losses as a result of the fraud.
The Securities Fraud Lawyers at FDAZAR
Franklin D. Azar & Associates is one of the largest plaintiff law firms in Colorado, known for championing the rights of individuals who have suffered damages at the hands of large corporations. Over the past 30 years, our attorneys have secured more than $1.5 billion in compensation for our clients.
Our class action department is staffed with experienced and knowledgeable attorneys who are passionate about litigating large, complex cases on behalf of consumers, employees, and investors. We are currently investigating cases involving employees whose 401(k) plans have been subject to excessive fees and mismanagement, improper fees charged by investment companies and banks, data security issues affecting Facebook users, and more.
If you have suffered damages as a result of unfair business practices, data breaches, or corporate misconduct, the class action lawyers at FDAzar may be able to help. Call us at (303) 900-5595 or contact us here for a free, no-obligation consultation.