So you’ve gotten your first taste of trading after putting some the stimulus check into GameStop (GME) or Tesla (TSLA).
Reddit-fueled stocks, electric vehicle companies, cryptocurrency, and other trending investments have been a focus for many YOLO investors during the pandemic, but by now you've been around long enough to know that stocks don't actually only go up.
Taking a spare $100 from a friendly bet and putting it into Bitcoin (BTC) is far different than systematically investing money into the market to achieve long-term gains. That drastic change may seem daunting to some investors but it is far easier to get started than most people think. You can get started with just a few simple principles.
How Do I Start?
The first step is recognizing what you are looking for out of your investments and what the long and/or short-term goal is. A young investor with spare cash might not be thinking actively about retirement but starting now makes it far easier to reach that point in the future. That $100 might not seem like much but that original investment making 7% returns for 40 years would be worth just under $1,500. All it takes is an additional $100 contribution every month for those 40 years to achieve a portfolio worth just under $250,000. Now, building a retirement fund and day-trading trending assets are very different but it takes to go from one to the other is a change in mindset and goals.
Looking Ahead
Steady and consistent returns over the long-term should be the focus when moving from "trader" to an "investor". Building a diverse portfolio that minimizes risk might lower upside potential that investments like penny stocks provide, but over the long term will be much more stable and reliable in terms of getting to where you're trying to go. Diversifying your assets so that your portfolio is less subject to unsystematic risk will drastically reduce volatility from shocks to particular sectors or industries. Even just using index investing to track a major index such as the S&P 500 will give you average market returns and easy diversification due to the fund tracking an index that consists of hundreds, if not thousands of individual stocks.
Passive Investing
The biggest change an individual needs to make when trying to transition from a trader to an investor is not look at the portfolio value every day but instead analyze where it is heading and check on it routinely to make sure your allocations are still aligned with your goals. Strategically investing and occasionally rebalancing a portfolio will help you reap the benefits of time in the market and allow that portfolio to grow at a steady pace. Instead of selling GME stock to buy DogeCoin because that's the new rocket everyone is trying to catch, sell investments in cyclical industries when they're high and use that to purchase more defensive stocks such as Costco (COST), which will hold up better in a recession.
What Do the Analytics Say?
Another major factor people need to consider when moving from trader to investor is focusing on more than just market sentiment. Trading based on market trends can lead to significant gains but over the long term, value and fundamental based metrics are extremely useful for building a portfolio that can provide steady returns over the long term. A firm’s balance sheet might not be the major force moving its stock price after a recent news announcement, but it is predictive of where a company is headed and can tell you if it should be expecting troubles or successes in the future. Even just analysts rankings and valuation metrics such as PEG ratios are quick tools for investors to see how experts feel about particular stocks and if they appear to be overvalued or undervalued at the current time.
Wrapping Up
Investing for the long term is, in many ways, actually much easier than trading as it really only requires passive investing for the most part and is not reliant on timing the market, something that few, if any, can do consistently for a long period of time. Buying and holding is the boring key to consistent returns over time. You just need those periodic checks to make sure it is still balanced according to your goals. Perhaps most importantly, you should be investing in companies that you believe in and think will continue to prosper going forward. So if you believe Starbucks (SBUX) is going to continue to dominate the coffee market for a long time, purchasing SBUX stock is a great way to start taking part in the company’s returns.
