When Not to Invest in Stocks

Investing in stocks is all the rage, with ever more private individuals putting their hard-earned money into the stock market. But stocks are not always a suitable investment. This guide lists typical situations in which investing in the stock market is not advisable.

1. You do not have an emergency fund

An emergency fund provides ready money in financial emergencies. Investing in stocks when you have not yet built up a separate emergency fund is unwise. Without having a financial buffer of easily accessible money, you may be forced to sell your stocks at a bad price to bridge a financial emergency. Having to tuck into your stock investments to cover costs also is not compatible with long-term investing.

The rule of thumb: Keep enough money on hand to cover your budget for between three and six months. This money can be kept in a savings account. If you ever need a large amount of money – for a car repair or dental work, for example – you can take it from your emergency fund.

2. You have neither a goal nor a strategy

Investing in the stock market works best when you have a clear investment strategy. This strategy should match your investment goals. If you have neither a goal nor a strategy, you run the risk of investing in an incoherent and random way. It is hypothetically possible to achieve a high return without having a strategy. But investing without a plan brings more risk of loss, and can result in investments that simply do not make any sense.

3. You are led by your emotions

Emotions are a bad master. If you tend to choose investments based on your gut feeling or mood, or to react impulsively when prices fluctuate, then you would do well not to invest in stocks. Investments in the stock market should always be decided rationally based on facts.

If you like to invest in specific companies or sectors solely on the basis of personal interests or preferences, make sure that these emotional investments make up just a small part of your total investment portfolio. 

4. You will only invest for a short term

The prices of stocks are constantly changing. The risk that your stocks will lose value is exceptionally high when you only invest for a short term. That is true even if you have a diversified investment portfolio. For that reason, you should only invest money in stocks that you will not need for a long time – ideally for at least five to 10 years. Stocks only reach their profit potential over long terms. If you have money that you want to invest for a short term – towards a new car or a home purchase, for example – then savings accounts or medium-term notes are normally more suitable. 

Day trading is a possible exception to this rule. But you should be fully aware of the risk of loss, and should only gamble money that you can easily live without.

5. You cannot deal with losing money

It is generally impossible to earn a return without taking on some amount of risk. There is always a risk of loss when you invest in the stock market, and much more so when you invest for a short term. If your portfolio losing value causes you to feel stressed and unhappy, then stocks are not the right investment for you. Instead, you should use investment vehicles that do not fluctuate, such as savings accounts, fixed deposits, and medium-term notes.

Tip: Using a fund savings plan to invest in stocks and ETFs in an automated way can be a solution. Once you set up a savings plan, everything is done automatically, so there is no need to check on your investments or stress about fluctuations.  

6. You are uninformed

When you find yourself getting all gung ho about stocks you never heard of because of recommendations from peers, it is best to proceed with caution. Making investment decisions without having a solid base of information is akin to playing the lottery, and the chance of your losing the bet is similarly high. If you are serious about investing in the stock market, you should take time to research the facts and figures of the companies and markets that you want to invest in.

7. You have unrealistic expectations

Before you begin investing, make sure that your expectations of investment returns are realistic. Trying to chase completely unrealistic profits is not a sensible way to invest, as it will likely push you into making very risky investment choices. As a general rule, the higher the potential returns, the higher the risk of loss. In every case, greed and investing are always a poor combination.

Disclaimer: This article is published for informative purposes only, and should not be considered as investment advice. The publishers do not accept any liability in connection with this publication.

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