Growing up, everyone I knew wanted to be rich. As I got older, I started to understand the difference between being rich and being wealthy. If you win the lotto you’re rich. If you own companies, real estate, precious resources such as water, mineral mines, precious metals, or agricultural crops then you’re wealthy.
Growing up in a third world country, education was considered the great equalizer. Today, I posit that education and technology are the great equalizers.
In this article, I’m going to focus on investing. The strategies discussed aren’t going to make you rich overnight, but form a template to start building wealth. We’re going to cover:
- Why should you invest?
- How much should you invest?
- When should you invest?
- When should you sell?
- Why use Robinhood?
- How should you research stocks?
Why Should You Invest?
Great question. Investing is an excellent option for building wealth. Most experienced investors will instruct you to payoff debt and build an emergency fund before investing. That’s good advice and you should take it. I’m assuming that you’ve taken that advice or ignored that advice completely and you’re ready to invest. Don’t expect to get rich from the strategies I’m going to discuss. This is about getting started, not some get rich quick scheme. Besides, you can’t beat the market. There are algorithmic computerized agents that execute trades in nanoseconds. You’ll never beat them. The reason you should invest is that historically, over time, given the right portfolio, you’ll build wealth. It’s that simple.
Investing also teaches you about the economy if you take it seriously. You’ll start to understand how inflation affects currencies, why you want to minimize taxes, income stocks, growth stocks, passive investment vehicles vs active investment vehicles and broker fees. You’ll see the world differently because you’ll operate like if you have a stake in the companies you invest in. Investing also gives you confidence and it’s a secret weapon. Most people won’t know that you are skilled in the workings of the markets so they’ll be surprised when you mention a particular security is undervalued based on the P/E ratio. You’ll build up your vocabulary and enter the world of Wall Street.
How Much Should You Invest?
Thanks to technology, your access to the markets is without many obstacles. Invest your disposable income. Instead of buying Starbucks everyday, allocate it for investment opportunities. You can start small and invest $100 or $200 monthly. If you can afford more, then do so. Don’t worry too much about how much money you can invest as long as you’re satisfied with the amount and that it fits within your budget.
When you start investing, it’s important not to invest all your money in just one stock. You will need a diversified portfolio so that you can absorb market fluctuations. That’s right, there will be days when there is a down market and a diversified portfolio will prevent all your holdings from losing massive value. Remember, a diversified portfolio reduces the likelihood of losing all your money investing.
When Should You Invest?
For new investors, this advice is going to sound counter intuitive. You should buy low and sell high. If you look at the price of a stock and the stock is near its 52 week high, it may not be the best time to buy the stock. Think about investing like you’re going shopping at your favorite grocery store. You buy more traditionally higher priced products when they’re on sale, not when they’re expensive. It’s similar in the world of investing. You research stocks that you think are undervalued and then you buy them with the expectation they will appreciate in value over a period of time.
It’s important to always do research before you purchase a stock. Also, please don’t invest in companies or industries you don’t fully understand. That’s a really expeditious way to lose all your money. If you spend a lot of time going to Mcdonald’s fast food restaurant, then Mcdonald’s might be a good investment. You understand the business model, you spend money there often and you also notice that you’re not the only one spending money. Invest in businesses you understand.
When Should you Sell?
That’s the million dollar question. It’s not always easy to determine when to sell. Let me give you some advice. The number one rule should be don’t lose money. Rule number two is, refer to rule number one. Deciding when to sell will depend on your investment goals. If you believe in the company’s long term prospects, you might want to hold the stock for years. If you believe Apple will sell more iPhones than what most people think over the next three months then you can sell right before or right after their next quarterly report. Determining when to sell will depend on your investment objectives.
The securities I’ve purchased have all been long term investments. My holdings are in industries I understand and companies I understand. Some stocks are growth stocks which can be more volatile and other stocks are income stocks which pay a quarterly dividend. If you think that one of your holdings is overvalued, you can sell it, then repurchase it in the future when there is a market correction. If the market overall is overvalued, you can liquidate your overvalued holdings so that you can take advantage of the impending market correction.
Why Use Robinhood?
Robinhood is the easiest path to investing that I’ve found. It’s easy to get started and simple to use. There are many tutorials about Robinhood on the web so I’m going to focus on what makes Robinhood a good option for beginning investors. You can transfer money into your bank account from Robinhood and from your bank account to Robinhood easily. In my experience, the money is cleared within 3 to 5 business days. There are incentives for inviting users to the platform. Robinhood provides a history of all your transactions and Robinhood is mobile only. Mobile only means you can only access Robinhood from your iPhone or Android phone.
Robinhood Gold is a new feature that allows users to buy stocks on margin. Basically, margin means borrowing funds to buy stocks. If you’re starting out, please don’t buy stocks on margin. If you don’t know what you’re doing you’ll end up losing your money. When starting out, just invest money you actually have allocated for investing. When you become a more sophisticated investor, then you can consider using Robinhood Gold. Another good feature of Robinhood is that you can configure automatic deposits from your bank account into Robinhood to fund your investment account. One of the best features of Robinhood is that there aren’t commissions on trades.
How Should You Research Stocks?
There are many ways to research stocks. First, focus on stocks in industries you understand. A great site for researching stocks is Yahoo Finance. You can search by ticker symbol and get financial reports, the latest news, create a watchlist and view various charts. You can also view the day’s top stock performers and the day’s worst performers. Yahoo Finance has a very well designed mobile app so that you can receive alerts, do research and check on your watchlist all while on the go.
Another strategy for researching stocks is visiting a store location, buying their products and documenting the experience. If you like a particular clothing brand, visit the store. Is the store empty on the weekends? Are they out of stock for a particular brand? What’s the customer service like? Are they closing stores and switching to ecommerce or both brick-and-mortar and ecommerce are thriving? It’s important to always do your research before purchasing securities.
Getting started investing isn’t as difficult as it once was. Utilizing education and technology can ensure your investing career is successful. Everyone was a novice at some point in their life so just get started. I would like to recommend a book that teaches you about Value Investing. It’s called the Intelligent Investor and it’s one of the best books on investing you’ll ever read. See the affiliate link below. If you would like to contact me, just leave a comment below. Good luck in your investing career!
Disclaimer: I have a financial interest in Apple.