Savers who place money on deposit in a savings account will do well, over the long term, to merely keep pace with inflation. Investing in government bonds is hardly likely to make a fortune: governments may not be very adept at controlling spending, but they can’t be seen to give money away, either. Investing in precious metals can give great returns, but there is no income to be earned and price volatility is a problem too often ignored.
That leaves the stock market as the only viable alternative to financial freedom and long term wealth. Many investors shy away from the stock market, viewing it as no more than a rich man’s casino. But it doesn’t have to be that way. Taking a disciplined approach to stock market investing can produce returns unachievable elsewhere.
Here are ten steps to follow if you want to get rich by investing in the stock market.
Learn to select stocks to invest in
There are many different ways to pick stocks, ranging from fundamental analysis – examining a company’s balance sheet, earnings potential, and prospects for the future – to the technical analysis of share price patterns. You don’t need to be a mathematical genius to do either proficiently, but you do need to learn the craft and be consistent in approach.
Have an investment strategy
Selecting the stocks to buy is only a part of the equation of successful investing. The success of an investment portfolio will rest on the strategy employed by the investor. Risk needs to be managed, entry and exit points adopted, and costs of dealing borne in mind. Some investors select stocks, buy them and then hold for the long term. Others have a more active outlook, willing to buy and sell shares regularly as loss limits are reached or price targets hit. Set an investment strategy, but be flexible to adapt to the needs of the time.
Use dollar cost averaging
It is tempting to invest a lump sum in one trade, at a single moment. Certainly, if the trade proves correct then such an investment style can make healthy profits very quickly. But stock prices fluctuate on a daily basis, and this means they fall as well as rise. By investing over a period of time – drip feeding investment cash into the market – an investor takes advantage of the times when stock prices are down as well as up.
This process is known as dollar cost averaging, and is a recognized way to smooth entry levels and price volatility of an investment portfolio. By investing regularly, perhaps monthly, a trading discipline is achieved and a more active approach to portfolio management naturally taken.
Diversify your portfolio
Though it may be difficult, and costly, to spread investments across a number of stocks or business sectors when you first start investing in the stock market, doing so when it is financially viable to will help the longer term performance of your portfolio. You should consider holding shares in more than one company and more than one business sector. This helps the winners outperform the losers, and takes advantage of the changing economy and its effect on business.
Keep abreast of news
Information is power. By following the news particular to the companies in which you have invested you will better understand your investments and make more considered buying and selling judgements This also stands true for the industries in which you are invested, and general economic situation.
Regularly monitor your portfolio
As well as keeping up-to-date with current news that affects your stocks, also ensure that you know how your portfolio is performing. Measure against a benchmark, for example the S&P 500 index, and take remedial action if necessary. Monitoring your portfolio should go hand-in-hand with your investment strategy, and will form part of your investment discipline.
Conduct an annual investment review
Once a year, you should undertake an in-depth review of your portfolio. Consider how your stocks have performed, against their peer group and the wider market, and also review expectations for the economy and business sectors moving forward. For example, if a weakening economy is forecast, then perhaps a rebalance of holdings toward a more defensive mix will be required.
Reinvestment of dividends can be an expensive process, particularly when an investment portfolio is smaller and absolute dividends low. However, if these dividends are saved in a separate interest bearing account, then as part of your annual review they can be reinvested. This will buy more shares on which further dividends will be earned. Using a dividend reinvestment strategy compounds growth over the longer term, and is a key to portfolio performance.
Don’t feel you have to follow the crowd
There is safety in numbers, but following the crowd will not help you outperform it. Indeed, the likelihood is that you will buy after the optimum time to buy, and sell when many others already have. By conducting your own research and selecting your own stocks to buy and sell, your portfolio will be unique to your individual needs and requirements. Just because everyone around you thinks ABC is a good investment, doesn’t mean it is.
Invest tax efficiently
Wherever possible, look to hold your investments in tax efficient accounts, such as IRAs, Roth IRAs, or a 401(k). Understand how tax is levied on capital gains and on dividends, and if necessary employ the services of an accountant to help with tax planning.
Investing in the stock market isn’t risk free. Stock prices move up and down and are affected by changing economic and investment conditions out of the control of company management and the individual investor. But over a long investment time frame and with a well-considered investment strategy that includes risk management, a stock market portfolio can prove not only profitable but an enjoyable way to manage your future wealth.
By following the ten steps above, there is no reason why you should not get rich by investing in the stock market.