5 Ways To Make Money In The Stock Market
“How do I consistently make money in the stock market?” – the question all investors want to answer! Oftentimes, people look at capital markets as a way for investors to “outdo” the other investors. Market timing, picking “hot stocks”, and calling the bottom are all feeble attempts at trying to outplay the market as a whole.
Ultimately, the stock market is simply a way to harness human ingenuity. There are millions of hard-working people trying to solve the world’s problems. Consequently, we want to own a part in the innovative companies that these people are working to make better.
Here are 5 logical ways to better your chances at creating wealth over the long term in the stock market:
1. How You Should → Build & Monitor Your Personal Plan
“Everyone has a plan, until they get punched in the mouth” – Mike Tyson. Every investor should have a financial plan that is personal to their own situation. No two plans will be exactly alike. Once you’ve properly built and tested your tailored plan, monitor it well. Life happens and circumstances will change (ex. new job, children, etc.). Check in on your comprehensive plan at least once a year to see if it needs any tweaks.
How You Shouldn’t → Follow what Others are Doing and Reacting To Media
With all forms of media always blasting us, it’s hard to stay away from those telling you to “ACT NOW OR MISS OUT”. The truth is – most professional fund managers can’t even consistently beat the associated market index. Why listen to these folks, let alone TV personalities? The stock market, as a whole, is rarely outsmarted by the individual investor. Here’s the proof over 10, 15, and 20 year rolling periods.
Source: Dimensional Fund Advisors
2. How You Should → Diversification
Diversification is a key tenant of prudent investing. As the saying goes, “Don’t put all of your eggs in one basket.” The same goes with investing. It makes sense to spread out your money between different companies, geographies, sizes, etc. In doing this, you will be able to capitalize on returns as they show up in different markets (as well as helping to minimize risk).
Source: Dimensional Fund Advisors
How You Shouldn’t → Picking The “Best” Stocks
Concentrating your portfolio in a few hot stocks or cryptocurrencies – like focusing on any small number of holdings – can expose investors to substantial risk. Even if you manage to find a few winners, academic research argues that this “good luck” is unlikely to repeat throughout a lifetime of investing. For every individual who got into AND out of a hot stock/cryptocurrency at the right time, there’s undoubtedly another who bought or sold at the wrong time. Caveat emptor – let the buyer beware!
3. How You Should → Time IN The Market
“The big money is not in buying or selling, but in the waiting” – Charlie Munger. Great advice from one of the most well-known investors of all time. There will ALWAYS be pricing corrections, bear markets, and tough times along the way – this is part of the wealth generation process. Remember: invest early and often! As painful as it is putting more money into a downward-trending market, this may help you reach your financial goals over the long run if you stick with it. The chart below depicts the odds of success (i.e. making money) by timeframe. The longer the period, the better your odds are to see your diversified stock portfolio have a positive result.
Source: Ben Carlson, 8 Of The Biggest Investing Myths
How You Shouldn’t → Timing The Market
“Now is a good time to buy” does not work. Using a systematic approach works. For the vast majority of investors, trying to time the market is a proven fool’s errand. If you miss just a handful of the best return days, your overall return will be dramatically lower (see illustration). While stepping out when the market is high and back in when it is low sounds enormously appealing, it’s nearly impossible to do. Calling the bottom is a nonviable investing plan.
4. How You Should → Tax Loss Harvest in Declines
Tax-loss harvesting allows you to sell investments that have declined, replace them with reasonably similar investments, and then offset realized investment gains with those losses. The end result is that less of your money goes to taxes and more may stay invested and working for you. This is a great alternative to selling out of your positions, locking in losses, and hoping for a better time to reinvest. Be sure to follow the rules when tax loss harvesting – contact your financial advisor for qualified help.
How You Shouldn’t → Selling out in Declines
“Sell stocks now before it gets worse!” – every financial news outlet during a bear market. The pressure to sell out of your positions during a downturn to “minimize losses” is often tempting. The thing is, you don’t “lose” a dime until you actually sell. Market dips cause fear and anxiety. Humans are not wired for disciplined investing – we tend to panic sell when markets fall. We must give markets sufficient time to do what they do best over the long term – make investors money.
5. How You Should → Compound Interest
Albert Einstein once described compound interest as the “eighth wonder of the world,” saying, “he who understands it, earns it; he who doesn’t, pays for it.” Compound interest is what makes the stock market such an incredible opportunity. Given enough time, patience, and modest contributions, an individual can see his or her wealth grow exponentially. This opens doors that would not have been possible before.
How You Shouldn’t → Leveraged Positions
“I’ve seen more people fail because of liquor and leverage… You really don’t need leverage in this world much. If you’re smart, you’re going to make a lot of money without borrowing.” – Warren Buffett. Financial leverage refers to a strategy of using borrowed money to increase the potential return of an investment. This complex strategy can expose you to real dangers. Leverage magnifies both gains and losses. Don’t play with fire – leave leverage to the folks on Wall Street.
Whether you have $100 or $1,000,000 to invest, start where you are! Financial independence doesn’t just fall into your lap – it requires proper planning. Develop a financial plan that is personal to you and then stick with it. Your plan should always be the starting point for any financial decisions you make. In other words, it should be the “guardrails” that you abide by.
We understand that watching your portfolio trend downward isn’t fun to watch, but stay the course! A fiduciary advisor can help guide you through the ups & downs of the market, as well as all the emotions that come with being an investor. However we can help, we want to do so. Reach out to us today – we’d love to see how we could help better your financial situation!
The information provided in this report is for informational purposes and should not be considered a recommendation or solicitation to purchase or sell any particular security or investment strategy. Investments are not insured, subject to market risk, including the loss of principal. Investment strategies described may not be suitable for all investors. Equities are subject to market risk meaning that stock prices in general may decline over short or extended periods. The information contained does not consider any investor’s investment objectives, particular needs, or financial situation. Nothing in this material constitutes investment, legal, accounting or tax advice, or a representation that any investment or strategy is suitable or appropriate.
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