How Much Should I Invest in the Stock Market?

How Much Should I Invest in the Stock Market?

Many investing books say you must invest a certain portion of your capital in stocks and the rest in bonds. The figures vary, some say 50% in the stock market is too much, others say 20% is better and others believe that anything less than "everything" is a complete waste of time for the investor.

But really, how much should I invest in stocks?

The answer depends on several factors. The first is the investor's risk tolerance. If you always had money invested in a simple savings account, you will have psychological difficulties in investing all your money in stocks. Likewise, if you're an entrepreneur which is not used to any certainty in your life, you will probably feel more comfortable with the ups and downs of the stock market.

The recommended approach is that the investor should not invest a portion of his money that causes discomfort in the near future. If desired, you can always increase your investiments later, when you are better prepared.

The second factor is the purpose of investing and age. A teenager will have much more to gain by investing in equities than people older than 80 years. If you are middle age person, it pays to reduce the amount of investments in equities to get bonds, which are way safer.

It makes sense to invest a lot if you're young and if you're just a little older. In the case of a young man, if he loses anything, he has his whole life before his eyes, he can still recover everything and more later. But if he put all his money in bonds, he is really wasting his time.

On the other hand, if you're old and already has the assurance of a secure source of income in bonds, it doesn't makes sense to invest much more in equities just because you will not need the money anyway. Plus, what if somethin happens (like, hmm, the 2008 crisis) and you lose all your savings in the stock market? That's not great, is it?

Therefore, as your getting older, you should become a more conservative investor.

Exceptions

Obviously there are exceptions. Most investors are not professionals. However, if you know the market like the palm of your hand, go on and keep investing in stocks. Warren Buffett has already passed the age at which normal people would be advised to stay away from equities but still remains firm and strong in investing. But Buffett knows what he's doing, he knows how to invest in the stock market.

So this is it. If you're young, try to invest at least 80% in equities and a 20% maximum in bonds. If you are afraid to invest directly in stocks, invest in an index fund (Buffett's tip). If you're middle aged, try to keep a 50/50 ratio. And finally, if you're close to retirement, there is no reason to risk your savings, invest almost all (90%) in bonds and just relax.

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