Recommendations for the Stock Market

Limit Single Stock Risk

When you invest in a single stock, you essentially put all your money into that single company. If the firm goes out of business, you could lose most, if not all, of your invested money. While individual stocks can play a role in your portfolio, making them the core of your stock market holdings can be risky. Most small investors are unable to build substantial diversification by investing in individual stocks, and they might be better served investing in widely diversified mutual funds.

Investment costs matter more than you might realize, especially for long-term investments in the stock market. Every dollar you pay in fees and expenses is one less dollar available to invest. Over time, you lose not only that dollar, but all the earnings that dollar would have generated. Even a small difference in expenses can have a major impact on your portfolio over time. One way to keep your costs low is to make index funds the core of your portfolio. These funds tend to have low costs, because they simply hold all of the stocks in the index they track and require little management oversight.

As a stock market investor, you should take advantage of the tax-deferred options you have available. If you have a 401k plan at work, putting money into it and investing those funds in a low-cost index fund lowers your taxable income while helping you save for retirement. If you also can afford to contribute the maximum amount to a Roth IRA, you can build a portfolio that will give you tax-free income when you retire. The appeal of tax-deferral is that it frees you from current taxes and lets you put more of your money to work. Every dollar you save in taxes is another dollar that keeps working for you, possibly for decades in the stock market.

If you are a young investor just getting started in the stock market, it may make sense to invest your money in well diversified stock mutual funds. You should establish a solid emergency fund before you start investing. Putting aside living expenses that will cover you for six months to a year gives you the freedom to avoid raiding your stock investments for fast cash. It is important, however, to revisit your asset allocation as you get older. As long-term goals, such as the purchase of a home, a college education for your children and retirement, get closer, you may want to move some of the money earned from stock market gains into more stable investments, such as government bonds and certificates of deposit.