This is all about how to invest in the stock market the right way. You have heard it all before, if you invest in this or that, you will double or triple your money in a year. I am here to tell you that they are all nuts. You are not going to be doubling your money in under a year unless you are investing in ultra high risk stocks. You can take a look at my current experimental portfolio here for an example of these types of stocks. But if you are trying to figure out how to invest in the stock market the right way for long term consistent growth, well you are going to love this article. I am going to show you the absolute best way to invest and take advantage of today’s new investment vehicles.
I have been told many times by people that they don’t invest in the stock market because they cold lose their money. When you invest in the stock market, you are taking a risk. And yes, you could lose part of your money…temporarily. It seems that people have been watching way too much television lately. Everyone seems to believe that if you put your money in the stock market, then you could lose every single dime in a drop of a hat. There is not a better way to illustrate this then a good old clip from South Park. You will see that people watch these kind of shows and really believe that this will happen to them. It is good for a laugh, but it is not how the investing world works in reality.
The Best Way To Invest In The Stock Market
Now that I have spoken my peace, let’s get to answering the question of how to invest in the stock market the right way. I want to start out by saying that you can absolutely lose “some” money in the stock market at any given time. The market does go down just as it goes up. The thing investors need to realize is that the market will grow over time as it has always done since its inception. If we take a look at historical information concerning the S&P 500 for example, you can see that it has averaged about 10% according to my friends over at Market Watch. What I found to be interesting was that 63 out of 87 years were positive in terms of earnings, while 24 were losing years. That tells us to expect a bad year for every 3 good ones. I would say that we are easily hitting these averages over the last few decades and that should be considered going forward.
Now that we understand the probable outcomes of investing in the S&P 500 as a whole, here comes the trick to answering the question of how to invest in the stock market the right way, you avoid trying to beat the S&P 500 as a whole. I can hear you all now, “what do you mean avoid trying to beat the S&P 500?” What I am saying is that most professional fund managers are trying their best to do just that…beat the S&P 500 with their funds. Can you guess how many of these “professional” fund managers actually succeed in beating the market as a whole after all fees are deducted for their mansions and Ferraris? The answer to how many fund managers beat the S&P 500 is only about 1 out of 5 over a ten year period. And as the years stretch to 15 and 20, that number drops even more. The main problem is that they charge a ton of management fees for your money to be invested. Now only do you have to hope that your fund manager beats the S&P 500, but they have to beat it by the additional fees they charge you for their services. That can be an additional 2% or more every single year. With these kinds of fees, you can see why that almost all fund managers fail to beat the market over their careers with a specific fund.
Now that you see why investing with professional fund managers is a losing battle, here is what you can do without their help. Many people don’t have the time to research stocks on their own due to time constraints and the lack of training on how to properly pick out those cherry stocks. So the easiest thing to do is to put your money in a fund that matches the S&P 500 exactly, such as the iShares Core S&P 500 ETF. (IVV $228.10) or the Schwab U S Broad Market ETF (SCHB $54.96). They have expense ratios of 0.04% and 0.03% respectively. I implore you to ask your fund manager/financial planner what expense ratio you are paying for the funds your money is invested in. If you find that you are paying a higher ratio, you might want to fire those over paid “professionals” and just put your funds into one of the aforementioned ETF’s and save yourself a boatload of cash over a lifetime of investing. In the long run, you would be already beating over 80 of these pros in the first 10 years, if not more.
How Much Money Do You Need To Invest In The Stock Market?
“How much money do you need to invest in the stock market?” This is one of the main questions that gets answered incorrectly when someone asks. I have heard people say to wait until you have at least $1,000. This is completely wrong. If you sign up over at TD Ameritrade, you have the opportunity to buy ETF’s like IVV that I discussed up above for no fee’s as long as you hold on to the position for at least 30 days. That means if you are going to follow the strategy that I outlined up above, you can buy shares of ETF’s like IVV anytime you have enough to buy a share. IVV is currently trading at about $227.57, making it a bit pricey. There are many other ETF’s that are much cheaper to purchase, you just need to see what suits your needs. When it comes to how to invest in the stock market the right way, there is no number to small to start with.
If you are looking to figure out how to invest in the stock market the right way, you will want to take advantage of these no fee transactions and eliminate, or at least minimize, the fund management fees that are making fund managers multimillionaires off or our investment dollars. By purchasing your ETF shares at equal intervals, you will be taking advantage of the practice of dollar cost averaging. This allows you to reduce your risk even more. I will not go over all the details of what dollar cost averaging is during this article, but if you are interested in learning more, you can check out the subject here. Just know it is another strategy for reducing your overall risk by doing small purchases of the same stock over a period of time instead of buying it all at once.
When it comes to some other finer points related to knowing how to invest in the stock market the right way, you have to gauge the amount risk you are willing to take. I have written above about sticking to an ETF in order to avoid the management fees that will haunt you until you retire. But if you are willing to put in the time and ready to research the different companies available to you, then here are a few tips that I believe everyone should abide by in order to have a great long term portfolio. I like to put it this way to people when it comes to buying their own stocks, would you want to by a used car for $5,000 with 100,000 miles or the same used car $2,000? This is sort of how you have to look at stocks that you are considering. But instead of looking at the miles on the car, we are looking at the price to earnings ratio of the companies and the dividends.
When it comes to the price to earnings ratio, their is a long standing benchmark that investors are taught in the very beginnings of their education. Try to stick to stocks that are trading under the market average as well as under 15 for a long term average. If you can do both, then you have a decent shot at making a long term gain that is above average, which is the goal of every fund manager. For example, let’s take a look at the auto industry right now. There are quite a few possibilities to look at. I have decided to choose Ford (F $12.79), GM (GM $38.28), Nissan (NSANY $20.30), and Tesla (TSLA $254.47) as my examples for price to earnings selections.
The question is what company has the best price to earnings ratio? We find that the price to earnings ratios for the above companies are 6.37, 4.38, 9.49, and 0 respectively. We see that General Motors is currently leading the pack with an ultra low 4.38 price to earnings ratio. According to the long term market p/e of 15, we can see that GM is a steal at its current price of $38.28 a share. But does that mean that it is the best buy overall? That question is always the million dollar question. We need to see how much debt they have compared to the other companies, how the future lineup of vehicles looks compared to the other companies, and just the general sales growth compared to the other companies. (Of course there is always more things to consider, but let’s keep it short and sweet for this article)
What really scares me is that “0” p/e for Tesla. That is telling us that this company is actually losing money and not earning a profit. As anyone knows, you will eventually go broke is you spend more than you make. It is simple economics that seems to be missed when it comes to the stock market. I have written about shorting Tesla if you are curious about my take on the company. A negative p/e doesn’t necessarily mean that the company is going bankrupt, but it is definitely not a good sign if it lasts year after year though. Even though Tesla is losing money, the stock popped over the last few months due to the “Trump” effect of possible tariffs on its foreign competitors. I believe that a 35% increase in price for a company that is losing money seems a bit inflated to say the least. So please beware if invested in Tesla…it may be time to lock in your gains and run for the door.
As for the other 3 car companies, the all have good looking price to earnings ratios, but all three have different dividends to consider before investing. Ford is paying out a yearly dividend of 4.69%, GM is paying out 3.97%, Nissan is paying out 4.04%, and Tesla is paying out nothing. When looking at the three stocks that are actually paying out dividends, I would want to stick to either Ford or GM due to the lower p/e ratio and the fact that all three companies are paying out around 4%. All in all, it looks like you would probably be better off with GM and then Ford, but it truly is very close. Remember that there are a great deal of things to consider, but this is just a quick feel for an opportunity in this industry. I hope that this gives you a small taste of what it takes to know how to invest in the stock market the right way if you are creating your own portfolio.
At this point, I would recommend you read my other articles related to a few individual stock plays that could help out a portfolio in need…