When and How
By: Doron Levin and Dennis Genord
October 20, 2022
A rising stock market is often the reason for buying stocks, while a falling stock market scares some people away. Neither reason is valid for starting to invest– orfor stopping.
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Those who have lived through the stock market’s up and down cycles have learned that “time in the market” is key and can produce rewarding returns, while “timing the market” by trying to calculate the right time to buy and sell is a fool’s errand.
Whendepreciatedshare prices abound, opportunity is ripe for individuals whohave been meaning to learn about stocks to become better investors.Buthighly valuedshare prices shouldn’t be a deterrent, since they cancontinue to increase in valueover the long term.
Access to the stock market has never been quicker or simpler.
A variety ofsmartphone appsallow consumers to quickly get started.“Microinvesting”is a termconceivedto cover the deployment of small amounts of cash. In addition, most brokerages operate online websites with copious opportunities for instruction.
Newcomers or those who have dabbled instocks(or “equities,” as pros call them) ought to pause to consider their financial goals before committingto invest. Depositing money in a bank savings account offers safety, convenience and arelativelylow interest rate. At the current rates, decades would pass before $100 would be worth $200. Not the best way to generate funds to pay for a college education or retirement.
If the purpose of investing is to grow a small nest egg into a large one, the current interest rates paid by banks won’t come close to doing the trick.Buying cryptocurrencies or fractional shares ofvolatile stocksthat started life as special purpose acquisition companies (SPACs) might score a quick win, but more likely you’ll lose all or some of your money.
The best opportunity for long term growth remains the stock market, with an emphasis on established,good qualitycompanies– a sound piece of advice that brings with it several stipulations and qualifiers.
The evidence for this opinion is remarkable: over the past 50 years, the compound annualized growth rate (CAGR) for the stock market (meaning all stocks) has been nearly 11%, including dividends paid. Which means that $100 invested wisely in the stock market could well grow to $200 or more in about seven years, assuming the average 11% CAGR during that period.
What are the mysterious“stipulations and qualifiers”?The first is to ignore the general direction of the market at any given time.Sure, buying low and selling high is ubiquitous conventional wisdom, though more or less pointless for long-term investors: Trying to guess whether a rising market will keep rising or whether a falling market will keep plunging has proven to be a fool’s game. A much better idea is to keep in mind the long-term trendover recent decadesof majorstockmarket indicessuch as the DowJones Industrial Average, the S&P 500 and the Nasdaq Composite – all three of which over years and decades have risen. Identifyingcompanies in those indexesthat are leaders in their respective industriesand exemplify excellence in management can make for solid investments and lead to fruitful outcomes.
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Remember this: don’t try to time the market. Instead, spend timeinthe market.
Spending time in the market naturally helps avoid trying to time the market and enables investors to make consistent, regular purchases of common shares regardless of what the overall market is doing. By investing aconsistent amount of moneyinto a company’s stock over time, $50 a month let’s say, investors assure themselves of buying shares at advantageous prices, assuming the stock increases in price over time. This technique, called dollar cost averaging, is easier than ever to carry out, even for those stocks selling for relatively high per share amounts.As purchasingfractional sharesof a stock is common practice,dollar-cost averagingwith even small amounts of money makes entry into investing in the stock market easier than ever.
A second key stipulation to successful investing is diversification.
A good optionisto begin a regimen of establishing a portfolio of 10 to 20 high-quality companies. Do this using a long term, fundamental approach that focusses on investing in a variety of different size companies in varying sectors and industries. This will provide sufficient diversification in your portfolio. (If you’re already managing a portfolio of stocks,you maywant toadd to your portfolio.) Another method of diversification is to invest in amutual fund or ETF(exchange-traded fund) based on indices like the S&P 500 – meaning that your investment will be divided proportionately into small investments in the stocks held by the fund or those comprising the index.
Selecting individual companies should be an exercise in choosing high-quality growth stocks that have a record of consistent growth in revenue, profit and, if relevant, dividend payment.
Look for growth rates thatoutpace the competition andare faster than inflation or the overall economy. Understanding when such stocks are selling at a favorable price is key. To know more about themethodologyof recognizing high-quality growth companies and what constitutes a reasonable price, please explore theBetterInvesting websitefor an explanation ofonline analytic toolsand how to accessinstructional videos.
Remember, somecompanieswill paydividendsandautomatically reinvestthem, upon request, into additional shares of stock.Somecompanies use their profit to grow their sales or operations rather than to distribute dividends. Investors should understand the difference.It is important to reinvest all distributions, dividends and capital gainsfrom successful stocksales,intoadditionalstock purchases.This is of critical importance for investors who want to take full advantage of compounding - every investor’s friend!
The stock market contains a rapidly expanding universe of ideas, theories and principles. Some are worth knowing, others are to be avoided. Never stop paying attention to economic and financial news, practicing skills, listening for novel ideas and watching for opportunities.By applying a consistent, long term approach to investing in stocks, likeBetterInvestinghas taught for 70 years, investors can be assured they are properly positioned to grow their assets and improve their financial well-being.
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