“The idea that a bell rings to signal when investors should get into or out of the market is simply not credible. After nearly 50 years in this business, I do not know of anybody who has done it successfully and consistently. I don’t even know anybody who knows anybody who has done it successfully and consistently.” John Bogle
Investing, especially in stocks, is about putting your money to work for you with the goal of growing it over time. And, the sooner you start investing the less you may need to save because your money gets to work that much sooner. The more you invest; the more those returns can add up.
Investing does involve risk. And the stock market particularly will experience volatility, meltdowns and melt ups. But there are ways and means to mitigate that risk. The key is to choose a strategy that incorporates a broad range of investments in stocks, bonds, and cash based on your risk tolerance and time horizon and never put all your money in one particular stock.
Intelligent investing is based on the relationship between price and value. One other important factor is time. Assessing the stock price relative to its intrinsic value remains the most reliable way to invest for the long term. To protect yourself against market downturns, a long-term approach is essential.
Important steps to smart investing
All too often, people fail to think about how to start or just fail to start investing. To stay ahead of inflation, your money needs to earn more than a typical savings account pay. Research indicates that the best action a long-term investor can take is to start investing early in life, like in their early twenties—regardless of what the markets are doing.
Create an investment plan
“The man without a purpose is like a ship without a rudder.” Thomas Carlyle
Like a ship without a rudder, trying to manage your money and achieve your long-term goals are unlikely without a plan. You would not start a trip without planning and mapping out your route in advance. So,why would you save for retirement without first planning your path to achieving your short-, intermediate-, and long-term financial goals. You will need to:
- Have an investment plan that is realistic and actionable.
- Understand your plan, follow it, and adjust it when things change in your life.
Put your plan into action.
- Keep your portfolio diversified with an asset allocation that’s right for your risk tolerance—and stick with it.
- Don’t wait. If you invest now, you’ll start earning sooner.
Stay on track.
- Do periodic checkups to keep your portfolio healthy.
- Keep in mind that long-term goals are more important than short-term performance.
When you invest in a stock, you are buying ownership shares in a company—also known as equity shares. Your return on investment, or what you get back in relation to what you put in, depends on the success or failure of that company. If the company does well and makes money from the products or services it sells, you expect to benefit from that success. There are two main ways to make money with stocks:
- Dividends. Publicly owned companies can choose to distribute some of those earnings to shareholders by paying a dividend. Shareholders can either take the dividends in cash or reinvest them to purchase more shares in the company.
- Capital gains. When a stock price goes higher than what you paid to buy it, you can sell your shares at a profit. These profits are known as capital gains. In contrast, if you sell your stock for a lower price than you paid to buy it, you’ve incurred a capital loss.
Both dividends and capital gains depend on the returns generated by the company—dividends as a result of the company’s earnings and capital gains based on investor demand for the stock.
The performance of a stock can be affected by what’s happening in the market, which can be affected by the economy as a whole or by changes in investor psychology. For example, if interest rates increase, and you think you can make more money with bonds than you can with stock, you might sell off stock and use that money to buy bonds.
If many investors feel the same way, the stock market as a whole is likely to drop in value, which in turn may affect the value of the investments you hold. Other factors, such as political uncertainty at home or abroad, energy or weather problems, or soaring corporate profits, also influence market performance.
Important Element of Investing
Stock prices will be low enough to attract investors again. If you and others begin to buy, stock prices tend to rise, offering the potential for making a profit. That expectation may breathe new life into the stock market as more people invest.
This cyclical pattern—specifically, the pattern of strength and weakness in the stock market and the majority of stocks that trade in the stock market—recurs continually, though the schedule isn’t predictable. Sometimes, the market moves from strength to weakness and back to strength in only a few months. Other times, this movement, which is known as a full market cycle, takes years.
At the same time that the stock market is experiencing ups and downs, the bond market is fluctuating as well. That’s why asset allocation, or including different types of investments in your portfolio, is such an important strategy: In many cases, the bond market is up when the stock market is down and vice versa.
Your goal as an investor is to be invested in several categories of investments at the same time, so that some of your money will be in the category that’s doing well at any given time.
Savers often think they can’t afford to lose any money by investing in the market. But they don’t realize that when they don’t make their money work for them, they are losing purchasing power. Inflation, for example, creeps up over the years and steals from your savings if you’re not earning enough to make up for it.
- https://www.oaktreecapital.com/docs/default-source/memos/nobody-knows-ii.pdf