There are many methods of investing; real estate, stocks, gold, bonds, cryptocurrency, NFT, and collectible goods like sports cards, or vintage cars.
However, for people who want hassle-free ways to invest, the stock market is the easiest way to invest in companies for the long term.
Even in the stock market, there are many methods and strategies that investors can partake in. Some investors like to day trade which is to buy and sell multiple times throughout the day profiting from a large bet on a small incremental change in stock price. Some people try to time the market and invest based on the macroeconomic outlook and invest during the bull cycle and sell when there is a gloomy outlook in the macroeconomy.
Investors like Warren Buffett and Ray Dalio who own Berkshire and Black Rock respectively are value investors who invest in cash flow positive value companies and invest for the long term. Berkshire invested in Coca-Cola in 1950 at $3 with a current share price of $30. The dividend of 2% his rate of return based on his cost basis is yielding a 64% dividend rate. Aside from these big investors, there are also millions of everyday investors who use the buy-and-hold method of investing to build a large sum of wealth.
Buy and Hold methods for the long term is touted as one of the smartest investment method and frankly the easiest as you don't have to worry about it day after day or hour by hour. Looking at S&P 500 index since 1983, you can see that it has gone from under 150 to now 4000, an increase of 2,680%.
However hindsight is always 20/20, and in the midst of each period, there are several occasions of a 50% correction and many people have pulled all their investments out. But investors who kept their money in the market for the long term have gained a lot of profit.
Why do investors try to time the market? People have a gambling mindset toward the market and everyone feels that they can beat the market by timing it. Sometimes they can earn big bets and feel they have figured out a system. But in the long term, the majority of these investors lose money making risky bets.
The long-term buy-and-hold strategy has proven to be the superior strategy for most investors who do not have the time to research upcoming companies or the best-performing stocks.
Of course, over a long duration of time, some of your stocks may decrease or even go bankrupt. But if you have a diversified portfolio of investments, your overall rate of return should yield roughly 8% per year with some years going up higher and other years going down.
I use the long-term investment strategy where I buy and hold for the long term while investing consistently and investing $1000 in the stock market each month. While investing for the long term, I utilize a strategy called the dollar cost averaging method where you buy more in the investment when the share price goes down to lower your average costs.
Investments that you own can go down for various reasons, some out of the company's control such as macroeconomics or incidents that cause bad PR for the company in the short term. But if you believe in the company for the long term, these are the best time to invest in the company. Experts recommend you have "Dry Powder" which is cash in your brokerage, so that when stocks that you like fall, you have "ammunition" cash to buy these companies and take advantage of lower costs.
The market has been volatile over the past few years with the stock market boom in 2020, followed by a crash in 2022. It was interesting to see how the adjustments to the interest rates heavily impacted growth companies that rely on cheap money to grow. Therefore, many of my speculative, growth companies have lost a significant amount of value.
Although it was unprecedented, savvy investors may have used macroeconomic strategies to reevaluate their portfolios and make adjustments. As I am a young investor but plan to invest for the long term, I can take this lesson and experience to make smarter decisions in the future.
For now, with my diversified portfolio and long-term mindset, I will continue to dollar cost average on stocks that I believe for the long term. During the months when the market bounces, I will leave the cash in the brokerage account to have dry powder for when the market goes down again. (read: Stocks That I Own in My Portfolio, as of 1/30/23)
It's a tough pill to swallow when you see your portfolio value go down, but understanding that in the long term, most companies make money, you can take a deep breath and not panic when everyone else is because this can be a good thing for you.
Comentarios