The stock market has been a roller coaster during the past year that began with a large drop in March 2020 and then recovered several months later. The pandemic, the election, and the economy all contribute to the increased volatility. So, how can you invest in the stock market at a volatile time like this?
Changes in the Market that Create Volatility
The market does not like uncertainty, and the pandemic and the economy created a lot of uncertainty. The vaccine has created more stability, and as more people go back to work, volatility could lessen.
Meme stocks have also created volatility. These stocks are heavily promoted on social media platforms and can rise and fall by double-digit percentages each day. If the meme stock is heavily shorted, a short squeeze occurs, pushing the stock higher. Once the excitement is over, the stock can fall back quickly, creating more volatility.
Another reason for higher volatility is that there are more traders with easy access to trading platforms. To trade a stock, all someone has to do is get on their phone and type in the trade. Many of these stocks are purchased for the sole purpose to create short squeezes, not on fundamentals.
Motivations for Investing Today
A recent Money Morning state of investing study surveyed 800 individuals who identified as having knowledge or experience with investing found that the top 3 motivations for investing are:
- 28% said their main motivation was to grow their net worth
- 25% stated they invested for their retirement
- 22% wanted an additional source of income
The survey results found that investors are willing to take the risk of investing in exchange for an opportunity to grow their net worth and save for retirement. Those that want an additional source of income will invest in stocks that pay a dividend.
A person’s income did not appear to make a difference in the percentage of their pay that they invested in the stock market. According to the Money Morning state of investing study, “our survey data found that the highest earners—those making $150,000 or more per year—reported investing 6% to 10% of their income. That’s the same percentage as respondents earning $50,000 to $74,999 per year. So while it’s not surprising that higher earners tend to put more money into investing, it may be news that the percentage of their salary they’re investing is the same as lower earners.”
Cryptocurrencies like Bitcoin have been in the news lately. But are cryptocurrencies the best way to invest money for the above goals? Cryptocurrencies are highly volatile, and if you don’t have a high-risk tolerance, they might not be for you.
Cryptocurrencies do not pay a dividend, so they will not be an additional source of income. Investing in cryptocurrencies could build your net worth and nest egg for retirement, but cryptocurrencies are certainly a riskier choice than traditional stocks at this time. But they do bear watching.
A strategy for growing net worth or for retirement is patience. Find companies you believe in or in industries you think will grow in the future. Instead of individual stocks, you can invest in mutual funds or exchange-traded funds (ETFs) that cover a portion of the market or a particular industry.
Sign up for a dividend reinvestment plan (DRIP) plan at a brokerage firm. When you invest in dividend-paying stocks, the brokerage firm will automatically reinvest the dividend payment into more shares. Over time, you will grow your investments and your net worth.
To invest for the future, avoid volatile stocks and cryptocurrencies. By avoiding such volatile trades, you can avoid the dramatic ups and downs of the stock market, and progress will be steady.