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Tag: investing strategy

  • Where do I invest and when do I start?

    In my previous post, I wrote about the various types of assets you can use for investment. To have a diversified portfolio, you should invest in a variety of assets.

    Diversification can mean two things:

    The first is diversifying within the same asset class.
    The second is having different asset classes in your investment portfolio.
    We all need a diversified portfolio

    So, for example, if you are investing in fixed-income securities, you need to invest in different types of those such as government bonds, corporate bonds, CDs etc.

    Similarly, if you are investing in stocks, you should invest in multiple companies from different industries and sectors. But when you invest in individual company stocks, you may only be able to invest in 5, 10, or maybe 15 companies.

    To achieve diversification using individual stocks, you will need to do a lot of research and invest a lot of money buying stocks from different companies in different industries.

    Thus, if stocks comprise a majority of your investment portfolio, then your investment is risky because it is based on the performance of those companies you bought shares of.

    So what’s the solution?

    For a beginner investor, who doesn’t want to put too much money in several individual stocks, the best way is to start with investing in an index fund or a passively managed mutual fund.

    What’s an index fund?

    Index fund is a fund whose portfolio are built to mimic the constituents of a stock market index. The most widely used indices in the US are S&P 500 index or Dow Jones Industrial Average, or the Nasdaq Composite index.

    Generally, Index funds should give you the same return as the index they follow. These funds buy all the stocks that are part of the index in the same proportion. So, it is like you have invested a little bit in each of those companies that comprise that market index. So yes, that would give you a very well diversified investment portfolio.

    Also, index funds are less volatile and therefore are a good investment compared to individual stocks, esp. for long-term investing. So, they are a great option for investment for your retirement.

    In my next post, I will argue why I like index funds more than actively managed mutual funds. I feel if you are sticking to read my post this far, you will be interested to know more.

    Don’t put all your eggs in one basket!

    The main point is to diversify so that if one sector or asset class doesn’t perform well, you don’t lose all your money.

    The second key thing for diversification is having different asset classes in your portfolio, such as stocks, bonds, real estate, commodities, etc.

    This brings us to the concept of asset allocation. Asset allocation simply means you decide what percentage of your money you want to put into each type of asset class.

    Asset allocation will vary from person to person, depending upon their savings, age, risk tolerance and financial circumstances.

    Finance theory suggests that generally, your investment in stocks should be 100 minus your age. So, if you are 25 years old, it should be 75% stock and 25% fixed income.

    So yes, it means you need to keep changing your asset allocation as you grow older. Later in life, your investment in stocks should be less, and high in other fixed-income assets.

    Now comes the million-dollar question.

    When should you start investing?

    The easy answer is now if you haven’t started already.

    You can start investing as early as when you first start earning. Even kids can start investing their allowance money and add to it periodically.

    Time plays a huge role in making your money grow, more than the dollar amount you invest. This is due to the power of investing!

    Your money grows overtime exponentially!

    If you are not convinced, you can take a look at my post here, where I explain this concept by using some simple examples.

    How much money do I need to invest?

    In the past, you would need a substantial amount of money to start investing. But things are much more simple now. With no minimum, no commission brokerage accounts, and fractional ownership of shares, you can start investing with as little as $10 a month.

    You can set aside $1-$5 a day and make monthly contributions of $30-$150 a monthly.

    These are some of the top brokerage firms in the U.S. – Charles Schwab, Fidelity, TD Ameritrade, and Vanguard. Stay tuned for my post on how to open a brokerage account!

    I hope you found this information useful, I will cover Real estate and commodity investment in another post! But this is useful info to start investing now.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice on an individual basis. 

    Credits:

    Images- https://www.freepik.com

  • How to always make money in the stock market? What is a Dollar Cost Averaging?

    Today, I will introduce you to a very useful concept called Dollar-cost averaging. It is an investment strategy where you invest a fixed amount of money every period, such as every month, despite the stock market trend. You could invest your money in an index or mutual fund, or electronically traded funds (ETF).

    So, no matter how the stock market behaves if you keep putting in a fixed dollar amount every period, over the long run, it will surely give you good returns.

    Let’s understand this with a help of an example. The dollar amount you contribute each period, divided by the stock price, gives you the number of stocks you buy for that period. So, when you invest a fixed dollar amount (let’s assume you contribute every month), you end up buying fewer stocks when the stock price is high.

    Conversely, when the stock price falls, you buy more stocks for the same dollar amount you invested during that month. This way, your average purchase price per stock stays low over time.

    There is an excellent example explaining dollar cost averaging that I found on the Charles Schwab website.

    To be a successful investor, you need to have patience and invest for the long term. People expect their money to grow overnight and this certainly doesn’t happen.

    Why people need to use this strategy?

    People try to buy stocks when their prices are falling and sell when they are rising to make profits. But it is very difficult to time the market. There is no foolproof way to know how the stock price will behave the very next day or coming days.

    Sometimes, you may buy a stock thinking it is selling at a low price and will rise in the future. If the stock price rises and continues to rise, you made a good investment decision until you sell it at a higher price and make a profit. However, if the stock price falls further for the next few days, and you end up selling it at a lower price than you bought it for, you made a mistake.

    Dollar-Cost Averaging

    In reality, people panic and start selling individual stocks when the stock prices are going down. This is actually the wrong thing to do.

    Also, people, sometimes, don’t buy those underpriced stocks thinking they are not performing well and will continue to fall.

    We, as individual investors don’t have enough information about a specific company and other economic events. Hence, our guesses about market stock price and index movements are not always correct.

    How does Dollar cost averaging help?

    This can be avoided when we invest a fixed dollar amount. With dollar cost averaging, you can stick with a good investment schedule and will not overthink about when to buy or sell stocks.

    I like to invest worry free

    Thus, a big advantage of dollar-cost averaging is that it is a worry-free method of investing. The emotions and anxiety associated with investing are taken out and you just invest a fixed amount at a fixed time (such as every month), ignoring the market ups or downs.

    An example of dollar-cost averaging investing would be the investments done through your employer’s 401k plan. Here you and your employer contribute a fixed amount of money towards your retirement income.

    I hope you learned something from my post today. If you haven’t already, you will start making use of this useful technique in making your investment decisions. Also, please start early, as time is the key. After creating the emergency fund in your savings account, invest your money so it can grow.

    Disclaimer: The information presented here is for educational purposes only. I am not a financial advisor and do not provide investment advice. I recommend you consult a qualified financial advisor to make investment decisions.