Wow. We’re only two months into 2021, and the financial news has already made a splash. Enough hoopla has already been made about GameStop, but I do think there is one teachable moment in all of this. And that’s the buy/hold strategy. Yes, GameStop had colossal gains in a short amount of time. But with it came colossal loss. During its trading frenzy, GameStop went from $20 per share to $483 and then back down to around $40 now. For anyone who bought the stock for more than $40 (or today’s price), you’re probably worried because you’re thinking, what if it goes down further? On the other hand, if you were already invested in GameStop stock from January 1 until now, you’d still be at a gain. By focusing on the end result rather than day-to-day performance, you won’t be bothered so much by the ups and downs that all stocks inevitably endure.
The best thing that came out of the GameStop experience is that it generated huge interest in the stock market. With recent news putting the stock market at the center of attention, this month’s topic will be especially relevant. Let’s take a look at what you need to know about investing.
Why is investing important?
We are typically taught that we have to work for money, so naturally the only way to make more money is to work harder, right? Wrong. There is another way. We can also make more money by investing some of the money that we have made. If you ever wanted money to work for you, investing takes your seed money and grows it over time, resulting in what’s known as compound interest. Like plants, not every investment grows. But for those who spend a little time understanding how to invest, the payoff is well worth it.
How do I get started with investing?
Anyone can invest their money. I repeat, anyone. Most employers offer a retirement plan where the money you contribute can be invested. Children can use a parent’s brokerage account or start one of their own with an adult as custodian. Many college savings plans, or 529 plans, offer investment choices as well. If you have none of the above, you can get setup easily with a brokerage account of your own. While Robinhood has been making the most waves, there are other established names like Fidelity or Charles Schwab or TD Ameritrade for commission-free trading.
When should I start investing? When should I stop?
Ideally we can all start investing from the day we are born. If, like most people, that did not happen, then the next best option would be as soon as there is money to invest and the investment has to be for a long-term goal, like retirement or a big purchase. In case the buy/hold strategy was not clear earlier, don’t worry about timing the market. By remaining invested for the long-term, the end result is what matters, not what happens between today and tomorrow or next month. As for when to stop investing, you just might continue to be invested for as long as you live. After all, the best case scenario is that your money outlives you, rather than the other way around. However, if the money is for a finite goal, like a home purchase or college, then it makes sense to shift investments into something more stable like cash some time before or when you withdraw your money.
What are the different types of investments? Which ones are best?
Once you enter the world of investing, there is a plethora of investments you can choose from, with the most common being stocks, bonds, mutual funds, and commodities. Refer back to the Ace Academy article on Compound Interest or just do a Google search to learn about the various choices.
The second question is commonly asked in the financial industry. The truth is, no one can tell you with 100% certainty which investment will perform better or which stock to pick. There are times when a company’s stock may be doing spectacularly well in comparison to its own financials. How is that possible? It’s all up to investor mentality. Before you invest, take some time to study past performance or ask a financial advisor.
What are some smart strategies for new investors?
As mentioned before, investing comes with risk, the risk of loss. However, we can minimize risk with some simple tactics. We already discussed buy/hold strategy. Another strategy is diversification. Instead of putting all your money into one investment, why not spread it out, so one or more investments can perform well when the others don’t? One more tip is to use dollar-cost averaging instead of timing the market.
Although investing may seem like gambling, with a bit of education, you will be better off investing than gambling. So take your money, throw in a dash of diversification, add dollar-cost averaging along the way, bake for some time, and you’ve got a recipe for wealth!
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