5 Things to Consider Before Investing In Stocks
Building blocks of a solid investing strategy
The number 1 mistake people make when investing in stocks is that they do it with zero strategy. When people ask me what stocks to buy, I ask them about their investing goals. And the worst answer I get is "I just want to make money".
The fastest way to be broke is to invest in the stock market just to make money. You need to have goals. And your goals will inform your strategy.
Here are 5 things you need to take into consideration if you are investing in stocks:
If your goal is to have consistent cashflow from your stock investments, then your investment strategy must reflect it. This means that you must be buying stocks that pay dividends.
A dividend is a share of the profits that public companies pay to their shareholders. It is mostly paid quarterly. Not all public companies share dividends. This is why it is important.
If cashflow is your goal, then you should never dabble into stocks that don't pay dividends. It doesn't matter how rosy it looks. If it pays no dividend and your goal is cashflow, you must not invest in it.
People lose money in stocks mostly by investing in things that are not consistent with their investing goals.
Are you investing for the long term or the short term? A strategy that works well for 10 years will not work well for 6 months. A strategy for 25+ years will certainly not do well in 1 year.
How long do you want to play the game? And yes, it is a game. You have to decide long before how long you want to be in for. Maybe it's money that you have to use in 2 years to pay for something. Or it could be money you made from selling an asset that you want to preserve into retirement.
If you want to go super long-term, then the index fund is probably right for you. Maybe the Nasdaq 100 or S&P 500 index would work for you.
But if you are short-term and have a bit of an appetite for risk, you can explore leveraged financial products. But you have to understand the risk you are taking because you can lose more than the capital you invested.
If you are using any of the leveraged financial products, it must always be for the short term. And you must know what you are doing. If you use this as a long-term strategy, I can almost guarantee that you will lose all your money and be in debt.
Here is another important point to note. Most people don't think of this in their strategy until it is too late. You have to factor taxes into your strategy.
I know some people who capture losses on their stock trades so that they can use it to offset their taxes at the end of the year. The rule is that if you sell a stock at a loss (meaning the price is lower than when you bought it), the government will allow you to deduct that loss from the other profits you made, which reduces your taxes.
Consequently, there is a capital gains tax. This is when you sell at a profit. Every sale you make at a profit is taxable. So, if you sell 100 times within a year and make profits all through, you will pay taxes on all 100 profitable trades.
Now, that is overbearing for a lot of people. Some even don't know that their stock trade loss (as long as you sell), should be reported to tax authorities to lower how much they pay.
You should definitely factor taxes into your strategy. How do you want to pay your taxes? Remember, if you don't sell, the profit or loss is not captured.
Taxes are a very important piece in your investing strategy.
How you invest a $10 million lump sum is going to be different from how you invest a monthly investment of $500. Volume matters.
Are you setting aside a part of your monthly income to invest in the stock market? Or you got a big sum of money that you have to put to work?
There is a big difference in how you handle these two. If the volume is very significant, you might want to consider a hedge fund with a good track record over decades of investing.
If the volume is big but maybe not big enough for a hedge fund, you may decide to research a few companies, buy enough shares in one or two and request a board seat. You could split the fund into 3 or 4, and use separate strategies for each division.
If you are using a part of your monthly income to invest in the stock market, you might want to stick with the strategy that gives you the best return on dollar-cost averaging.
Who are you? Are you a middle-income earner? Do you have a 401k? Do you have dependents? Are you a business owner? Does your workplace match your 401k contribution? Are you a citizen or a non-citizen?
All these questions matter. What is good for a young working class with rich parents is different from what is good for an immigrant with a median-paying job. What is good for a single living in the city is different from what is good for a family man living in the suburbs. It matters to your investing strategy.
There are things you can do if you have a team of great accountants and lawyers. This is different from what you can do if you do your taxes by yourself.
It matters if you are a celebrity who travels the world often. Compared to someone who lives his whole life around a 4-mile radius. It all matters.
You want to have an investing strategy that rhymes with your lifestyle. Not an investing strategy that gives you anxiety. You want to have a strategy that you can understand, not blindly trust a money manager in a fancy suit.
In investing, if you don't understand what you are doing, you are most certainly being robbed.
You must factor these 5 things into your investing. That is the way you make profits with peace of mind:
Use this insight. And stay rich.