by Norman D'Souza

Created on: May 13, 2007   Last Updated: May 16, 2007

The first thing to make clear is why invest in the stock market. You can get 5-6% interest risk free so the first question to answer is why take a risk.
The answer is that on average the stock market has an average return of 9%. This might seem like a small difference but if you look at an investment over 10 years comparing a rate of return of 6% to 9% you will see the difference.

$1000 allowed to compound over 10 years with a 6% interest grows to 1800. With a 9% return this grows to 2,400. This is $600 dollars more.
The key point to understand however is that the rate of return in the stock market is an average, sometimes in can be more then 9% and sometimes it can be negative. This means the closer to retirement you are the less risk you should take.
If you have sufficient wealth say over $10,000 dollars then you can invest directly in shares. You need to have between 8-15 stocks to have a balanced portfolio. This means that if one sector does badly say financials, you have other sectors such as oil that may be doing well. The key thing is to keep balancing your portfolio so that it is not weighted too heavily in one sector. This means that if for instance your bank shares do very well and now represent 40% of your portfolio instead of 20%, you need to sell 20% of shares and buy other things. This is what is meant by re-balancing your portfolio. This is easier to do with mutual funds, but you can now buy specialized funds so you might have to do this with mutual funds as well.
Bonds are generally the safest forms of investment as you near retirement and more of your portfolio should comprise of bonds.
Its also worth investing in foreign markets. This is more risky as you also have to consider currency fluctuations,but at the moment the dollar is low against most currencies and foreign markets such as Brazil and China are performing much better.
As you read and invest more however it really is not difficult to make a lot of money from the stock market. The easiest way is to invest is in tracker funds, these have low costs and outperform 80% of fund managers.
Do not get too elated if your portfolio does well, have a look and see if you are taking too much risk. If your portfolio does badly re-balance it and invest in less risky shares or funds.
Do not try to time the market however. We would all like to buy at the bottom and sell at the top but no one can predict the market that well. Buy and hold good stocks over the long term should provide you with enough income and growth.

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