By Tezcan Gecgil, PhD
(Prices and figures are of Aug. 21, 2020)
So you have finally decided to invest in stocks. Yes? Well, you are taking a big and important step.
With the initial decision to become a stock investor, possibly also comes anxiety as you may not be sure about how to choose the best companies appropriate for a long-term portfolio.
Becoming a good investor takes time, effort, persistence, and experience. There is no single right way to do it, but here are several fundamental concepts and analytical tools that may help interested readers make better-informed decisions when trying to separate winner shares from losers. This article will be followed several others so that I can offer a detailed discussion.
Do you know your risk tolerance?
In investing, risk and return go together; where there is a potential return, there is also a potential loss.
For example, since the end of the financial crisis of 2008, most technology shares have been darlings among investors with almost no limit to how much some of these stocks can appreciate. However, early 2020 showed investors how fast and far they can fall in a matter of weeks or even days.
Therefore, before putting your hard-earned cash into any investment, you’d benefit from understanding the investment risk and return spectrum and how your risk tolerance can affect your investment decisions.
Then it will be easier to stay calm when markets become volatile as in recent months so you do not allow other investors’ mood swings to affect your financial destiny. One thing you do not want to become is an emotional investor.
Stocks are not just ticker symbols
Too often investors forget that a stock represents the ownership of a company. A share is simply a divided-up unit of the value of a company.
Ideally you should only buy shares of businesses because you’d like to ‘share’ in the success of the company.
Warren Buffett, one of the most successful investors of all time, often reminds investors to only buy into the shares of businesses that they’d be ready to hold for the next decade.
By investing in companies, shareholders help increase the overall wealth of an economy as businesses in turn are expected to invest in projects that create long-term growth and prosperity for the economy.
As the share price of a company increases, the value of the firm increases, as well as shareholders’ wealth. Thus for individuals, investing in stocks can be a very attractive option for long-term goals like retirement. The higher returns that accumulate over time are simply too good to pass up.
Is there ever a perfect time to invest?
You may be one of those investors who worry about which day they should make the initial purchase of a stock they have identified. Instead, I’d rather encourage you to think of time in years. In other words, how long do you plan to keep your investment in the market?
Interestingly, Warren Buffett’s mantra above also highlights the importance of having a long-term approach to investing. The secret to consistent and successful performance is a disciplined investment process, no matter how the market behaves on a day-to-day basis.
And take heart, dear investor: whichever day you first invest in a given stock, time is on your side. Over the long haul, the compounding returns of a well-chosen investment add up nicely.