When we think about investing, one of the first things that usually comes to mind is the stock market. This is probably because, after many years of seeing Wall Street on the big screen, the stock market just feels the most familiar. And while we can’t believe everything we see in the movies, the truth is that the stock market is still the go-to place for many investors. In fact, when done well, investing in stocks can generate high yields. It can also help you solidify your financial position and work towards your long-term goals – such as buying a house, putting your kids through university, and saving for a stress-free retirement
What to consider when investing in stocks?
Now, there are few things that we need to consider before investing your hard-earned money in the stock market. First, you need to consider that stocks are typically considered a long-term investment. That means you can expect to hold an investment for at least five years – and that you’re not likely to get out quickly.
Next, you need to consider market volatility. That means you need to be ready for price fluctuations. Some people think that investing in stocks is less risky than investing in other products (such as derivatives). But unfortunately, this is not true. When you look at the stats, you can see that the level of risk and exposure is more or less the same, and you can see fluctuations of up to 20%. In fact, in recent years, due to the Covid-19 pandemic, the level of risk has been much higher and you can occasionally see fluctuations of up to 40%.
When you take into account market volatility, you also start to see why it’s important to see view stocks as a long-term investment. Now maybe you’re wondering why? Well, the main reason is that taking a long-term approach allows you to weather short-term price fluctuations. That way, you benefit from long-term price increases and you avoid incurring losses from short-term price drops.
What to expect when investing in stocks?
The average returns from the stock market over the past few decades have been around 10%, with the majority using SP500 as a benchmark. Now, can you beat that 10% annual figure? Sure you can and there are proven ways to do that. Here are a few things you can do to get started:
1 – Establish Your Investment Approach
Simply put, you need to decide how involved you want to be. Do you want to be the one who selects the stocks and makes the trades? Or do you want someone else to take care of the investing for you? Each approach has its advantages and disadvantages. It really depends on the type of person you are and how much time you can allocate to investing. A great way to start is by asking yourself::
- Are you the type of person that enjoys crunching numbers?
- How much time can you allocate to investing and to actively managing your portfolio?
- How are your research capabilities and analytical skills?
Based on your answers, you can determine which approach would be most suitable for you. Say that you want to be actively involved in the investing and in building your stock portfolio. If this is the case, then you need to be ready to put a considerable amount of time into researching the companies that you want to invest in. You will need to understand the correlation between every firm that you want to invest in. You will also need to understand how to diversify your portfolio and manage your overall risk. For some, this might be an easy thing to do, but for others, it might require some practice.
On the other hand, say you don’t want to be actively involved in the investing. Well, then you can take a different approach. One that doesn’t require your full attention, and one that doesn’t require hours of company analysis. If this is the case, all you need to do is find an investment company to take care of it for you. Ideally, one with experienced advisors and an excellent track record.
2 – Determine How Much You Want To Invest
Instead of looking at how much money you want to invest, a more suitable approach is to look at how much you can actually afford to invest. To do that, first you need to exclude a few things:
- Money that you have set aside for your emergency fund
- Money that you have set aside for your children`s education or for personal development projects
- Money that you allocate for paying your rent and for covering other living expenses
- Money that you need to use to pay off your mortgage or to support your business
Once you have set aside these funds, then you can start considering how much money you want to allocate to your investable funds. Once more, let’s keep in mind that your investable funds must be funds that you won’t need for at least the next 5 years.
3 – Consider how to allocate your funds
Your approach to allocating money will depend to an extent on your age. The older we get, typically, the more conservative we are with how we invest our money. Thus your allocation will change with time. For example, if you are in your 30s, then many financial advisors suggest that you have 60 %- 70% of your funds allocated to stocks (or derivatives) and the remainder allocated to other assets. However, as portfolio managers, we generally prefer a different distribution. We feel that investment portfolios should reflect current market fluctuations and that they should include a wider range of stocks, digital assets and derivatives. This is so that there is more diversification amongst the investments, and so that you have a better chance of increasing your income and capital gains.
4 – Select Your Stocks
For those of you who have decided to do your own investing, it’s important to spend time analysing various companies, across different segments, and across various industries. As a rule of thumb, try to invest in companies and segments that you know well. You might find that you focus on one segment, say oil and gas, and that because you know the segment well, you find it easier to make good investments. If that’s the case, then there is nothing wrong with having a good portion of your portfolio invested in a certain market segment. After all, too much diversification can also negatively impact the overall profitability of your portfolio.
Investing in stocks is risky, but if done well, can help you make money. If you do decide to invest, then it’s important to consider how much money you can afford to invest and how long you want to invest it for. It’s also important to consider if you want to manage your own investments or if you need help building your portfolio. For those who want to give it a go, take the time to learn about portfolio management theory and make sure you do your research first. For more information about investing, feel free to check out our blog or to check out our portfolios.
Risk Warning: The information in this article is presented for general information and shall be treated as a marketing communication only. This analysis is not a recommendation to sell or buy any instrument. Investing in financial instruments involves a high degree of risk and may not be suitable for all investors. Trading in financial instruments can result in both an increase and a decrease in capital.