It takes a freakin’ long time to build wealth through investing in the stock market. But it’s the most reliable way to do so. If you invested $10,000 in the S&P 500 in 1987 you should have $51,000 today.
You might have decided to start investing. Maybe you’ve read through a few blogs and you’ve decided to DIY your investments. But you don’t want to just throw money at the wall and hope it sticks.
Blindly poking your finger at the stock market section of the local paper won’t get you anywhere. Instead, take my advice. Invest wisely and broadly. Keep reading and I’ll help you make money on the stock market.
1. Time Is On Your Side
Unlike mortality, time is on your side with investing. Investing in the stock market isn’t a get-rich-quick scheme. If you have the entrepreneurial spirit, you might make more money investing in your own business. But your investment won’t be as secure.
Like a business, you can’t just liquidate your stock on a whim if you want to make money. You can’t rely on the capital to be there in five years either. The market is too volatile for that.
Investing in stock is playing the long game. You don’t worry about fluctuations in the market day by day or week by week. You rely on historical trends.
If you haven’t started investing, start now. As soon as you earn an income large enough to allow investment on top of living expenses, you should begin investing. Does your job have a 401K? Will they match what you invest? Take advantage!
The growth of your investment portfolio depends on three interdependent influences:
- The amount of capital you invest
- How much you earn on that capital annually
- How long you’ll invest
The more you invest for more time the more you make. It’s that simple.
2. Diversify Those Investments
This is the “don’t put all your eggs in one basket” section of every advice blog on investing. And we’re not going to turn that basket upside down. You’re likely not rich enough to follow the sage advice of people like Andrew Carnegie, “The safest investment strategy is to put all of your eggs in one basket and watch the basket.” This is especially not true in your first year of investing.
Risk is inherent in even the most sound investment. I mean, look at social media giants like Facebook and Snapchat. You would think these powerhouses would be sound investments, but look at what happened with snapchat. A Kardashian says “boo” and their stocks tumble overnight.
This is why you invest in multiple companies at once. Unless you have a time machine and can invest in Google before they became Thee Google, you might be fine putting all your eggs in one basket. Otherwise, hold to the old adage.
A single unfortunate event (unless it’s an entire stock market crash) won’t affect your entire portfolio. And it’s like this, if you own stock in six different companies and one of them tanks, you have the other five to hold you afloat while you wait for the one to recover or sell and rebuy elsewhere.
Not only should you invest in different companies, you should invest in different investments. There are three conventional investment categories. These are stocks, bonds, and cash.
Merely investing in stocks will tie you to only one of those categories.
Invest in Alternatives
Invest also in alternative investments. These fall outside the conventional categories but can be just as if not more lucrative. These investments may not be for the beginner as they have higher minimum investments and fees.
Investing in alternatives often carries more risk than traditional investments. But they have higher yields and lower transaction costs.
Some alternative investments are illiquid, meaning you can’t sell them as quickly and easily as stocks. The demand may not be there when you go to sell your investment. Think property after the financial crisis in 2008.
3. Control Thy Emotions
People make stupid decisions because of their emotions. When we are emotional, we stop using the logical “human” part of our brains and go into lizard mode. The lizard brain is the back part of our brain that’s also responsible for fight or flight.
If you quit being Spock and go all Captain Kirk on your investments, you’ll quickly lose out. Why because you’re already dealing with the emotions of other investors.
Oddly, the stock market is based on emotion. Take the recent boom in insurance stock. The reason the stock went up wasn’t based on normal market pressures. Democratic presidential candidate Elizabeth Warren released her “Medicare for All” plan and insurance investors felt good about it.
This is called a bull market decision. When the entire market feels good, it’s a bull market and when the entire market feels negative, it’s a bear. Every day is a battle between these emotions.
This is why you need to stay level-headed. You can stand apart from the crowd and watch the reactions and the trends. Humans are predictable and since you’re investing and not trading, you can afford to sit back and watch.
Do your research. When you buy a stock, you should know why. You should understand what the price is likely to do. This mitigates your risk and keeps you from having to liquidate early.
4. Avoid Leverage
When you use borrowed money to buy stock for your portfolio, this is leverage. It’s unwise and expensive. Often firms will charge you a whopping 50% of the stock price at the time.
It might be awesome if your stock moves up and you are savvy enough to liquidate before it drops. But if it drops, you’re screwed. You lose that 50% and whatever investment you might have made on top.
You need to have experience before using leverage. It’s like playing poker. You don’t want to get into deep debt while learning the game.