If you had invested $10,000 investment in the S&P 500 in 1990, that investment would be worth more than $1 million in 2020 - investing in the stock market when done strategically is a great way to build wealth.
In this blog, we are trying to identify a guide for beginners to invest smart and strategically in US equities.
What kind of investor are you?
How do you plan to invest in stocks? Every time you are opening a brokerage account, they typically ask about your investment goals and risk appetite. On the one hand, some investors prefer to be active traders and trade stocks regularly. While on the other hand, others prefer to trade stocks less frequently and leave them untouched for a few years.
Both strategies can yield high returns if well researched and done strategically. For example, you can regularly research stocks and adjust your portfolio accordingly. If done right, this can make your portfolio beat the S&P 500 every year. It is worth noting that even the savviest investors end up taking hits on their strategies more than you think.
Leaving stocks untouched for an extended period could also yield significant returns in the long run. Imagine investing $10,000 in Facebook post IPO - the IPO price of the stock was $38. As of November 11th, Facebook is trading at $276. Your $10,000 would have been more than $75,000 in less than a decade.
Diversify your portfolio
Savvy investors diversify their portfolios to mitigate risk. For example, they would allocate their investments across different industries. Hypothetically speaking, you can breakdown your investment into sectors such as technology, oil & gas, hospitality, and renewable energy equities. The concept behind diversification is that it is quite unlikely for all economic sectors to significantly decline in the same period of time. For reference, during the early months of 2020, oil stocks dropped while tech stocks rallied. If you only had 25% of your portfolio allocated to oil & gas while having the rest of your portfolio in other segments, your portfolio very likely would end up generating returns in 2020.
Make investing a habit
Build the habit of regularly pre-allocating a set portion of your paycheck to be invested. Making consistent investments disciplines you in building great financial habits and help you achieve your long-term financial goals while feeling a little impact on your daily life. Remember, once you decide to invest, allocate an amount to invest on a specific day of every month. Most of the time, when you say, "I am going to invest whatever is left over at the end of the month," you end up investing close to nothing.