Stocks are one of the keys to developing long-term wealth, according to any financial expert. However, while stocks can expand in value enormously over time, their day-to-day movement is impossible to anticipate with 100% precision. ASX’s recent ups and downs are a prime example.
So, how can you make money in stocks?
Actually, it isn’t difficult if you follow some tried-and-true methods and exercise patience.
1. Purchase and hold
Long-term investors have a saying: “Time in the market beats timing the market.”
What does this imply? In brief, one common technique to make money in stocks is to use a buy-and-hold strategy, which involves holding stocks or other securities for an extended period of time rather than purchasing and selling frequently (a.k.a. trading).
This is significant because investors who trade in and out of the market on a daily, weekly, or monthly basis sometimes miss out on the potential for high annual returns.
Consider the following: According to S&P Dow Jones Indices, 2021, the S&P/ASX 200 Index returned an average total return of 9.3% each year over a ten-year period. However, trading in and out of the market jeopardized your odds of seeing those profits, as being out of the market on its greatest days corresponds to significantly lesser returns.
While it may appear that the simple approach is to constantly ensure that you are invested on certain days, it is impossible to forecast when they will occur. Occasionally days of good performance will follow days of significant drops, and sometimes they will not. There is no assurance.
That means you must stay invested for the long term in order to profit from the stock market at its peak. A purchase-and-hold strategy can assist you in achieving this goal. (It will also help you when it comes to taxes because it will qualify you for fewer capital gains taxes.)
2. Select mutual funds over individual stocks.
Seasoned investors understand that diversity, a time-tested investing approach, is critical to decreasing risk and potentially increasing returns over time. Consider it the financial equivalent of not placing all of your eggs in one basket.
Although most investors prefer individual stocks or stock funds, such as mutual funds or exchange-traded funds (ETFs), experts generally advocate the latter to maximize diversification.
While you can buy a variety of individual stocks to mimic the diversification found in funds, doing so successfully can take time, a significant lot of investing expertise, and a sizable capital commitment. A single share of a single stock, for example, can cost hundreds of dollars.
In contrast, funds allow you to purchase exposure to hundreds (or thousands) of individual investments with a single share. While everyone wants to invest their entire portfolio in the next Google (GOOGL) or Amazon (AMZN), the truth is that most investors, including professionals, have a poor track record of predicting which firms will generate outsized returns.
As a result, experts advise most consumers to invest in funds that passively track large indexes such as the ASX200. This puts you in a position to profit from the stock market’s near 10% average yearly returns as easily (and cheaply) as feasible.
3. Dividend Reinvestment
Many companies pay a dividend to their shareholders, which is a periodic payment based on their earnings.
While the little amounts you receive in dividends may appear insignificant, especially when you initially begin investing, they account for a significant portion of the stock market’s historical growth.
For example, the S&P 500 in the United States saw an average yearly return of 6.7% from September 1921 to September 2021. When dividends were reinvested, the proportion increased to about 11%. Because each dividend reinvestment buys you more shares, your earnings compound even faster.
Because of the increased compounding, many financial experts advise long-term investors to reinvest their income rather than spend them when they are received. Most brokerage firms allow you to reinvest your dividends automatically by enrolling in a dividend reinvestment program, or DRIP.
You don’t have to spend your days betting on which specific firms’ stocks will rise or fall in the short term if you want to earn money in stocks. Even the most successful investors, such as Warren Buffett, advise individuals to invest in low-cost index funds and keep them for years or decades until they need the money.
Unfortunately, the tried-and-true approach to successful investment is a little boring. Instead of chasing the current hot stock, simply have patience and trust that diverse investments, such as index funds, will pay off in the long run.
It is possible to lose some, and very occasionally all, of your money when investing. Past performance is no guarantee of future results, and this article is not intended to be a recommendation of any specific asset class, investing strategy, or product.
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