A cornerstone of the American dream, property’s enduring cultural appeal is undeniable. Yet a stock portfolio has distinct advantages over the old quarter-acre block. Firstly, stocks only require a small lump of capital to get started and also require no physical maintenance.
Last year’s market may have erased trillions in Americans’ wealth, yet stocks remain the second most popular long-term investment (after real estate), according to a recent Bankrate survey.
And unlike the property market, the barrier to entry for stocks is lowering. The rise of low-fee exchange-traded funds (ETFs) has made diversifying a portfolio simple, while the proliferation of trading apps in recent years, like Robinhood and e-Toro, has made the stock market more accessible to newcomers. Despite this, going blindly into the stock market without a clear strategy can be a recipe for disaster. This article will look at the state of the market and how to get started investing in stocks in 2023.
Between a Bull and Bear
With the S&P 500 pacing back and forth just under the 4000 mark for months, the market seems poised on the edge of receding into bear territory and breaking into a new bull run.
After reaching all-time highs in 2021, the market tanked last year as geopolitical conflict, spiraling energy prices, soaring inflation, and monetary tightening battered investor confidence.
Transitioning into 2023, all eyes remained fixed on the Fed to see how firmly the central bank sticks to its hawkish path of raising interest rates and tightening balance sheets. Globally, the macroeconomic picture is complicated by the ongoing war in Ukraine and the bumpy reopening of China after zero-Covid, among other factors.
It is a daunting environment in which to begin investing. Yet while the IMF predicts a third of the world will dip into recession this year, the U.S., which it views as the “most resilient” economy, may avoid this fate. For investors ready to stomach the risks, stocks remain an attractive investment.
Like any purchase, it’s essential to know what you are buying. Before jumping into the market, let’s first get to grips with what stocks are and how a portfolio functions.
A stock is a piece of a company, like a share of ownership. You do not sit on the board of directors and call the big shots, but you get votes when they need shareowners to vote for items.
Most people get into stocks for two reasons: the dividends a company pays out or the price growth. A dividend is a share of some of the profits that a company gives to its shareholders.
Note: not all companies pay out dividends.
You must open a brokerage account (such as with Vanguard, Fidelity, or Schwab) to buy and sell different stocks.
Stock picking requires a significant learning curve and is generally inadvisable for amateur investors. It can be time-consuming, confusing, and nerve-wracking for novice investors.
It comes down to behavioral science. Investors get greedy and excited when stocks go up and rush to buy in; then, those same people sell them off when they go down low. Fear of Missing Out (FoMO) takes over, and people buy higher and eventually lose money instead of making any gains.
Research shows individual investors underperform the market by 2% annually. Even professional active fund managers need to do a better job as well; 89% of them underperformed the market in a 10-year period ending in 2019. There is another option – “buying the market” through whole-market or sector-based ETFs.
“Consistently buy an S&P 500 low-cost index fund,” Buffett said in 2017. “Keep buying it through thick and thin, and especially through thin.” The S&P 500 has averaged 9.8% over the last 90 years, and buying a simple, low-cost ETF can help you grow your money for the long term.
However, there is a case for tapping expert traders with an established market-beating strategy. Rather than trying to dissect company fundamentals yourself, consider using a trusted stock alert service to do the heavy lifting of researching and timing the trade. These subscription services will provide regular stock suggestions, and the decision to buy always lies with the individual investor.
History shows that buying and holding can bring significant gains over the long run. Between 1980 to 2020, the U.S. stock market (as measured by the S&P 500) delivered an annualized return of around 10%. It was a rollercoaster ride, with the tech boom of the late 90s and the financial crisis of 2008, yet those with the resilience to hold on through the volatility came out the other side on top. We cannot predict whether the next 40 years will deliver the same; as always, past results can not indicate future performance. Regardless of the market, committing to a long-term horizon and taking a sustainable and measured approach will serve you well on your investment journey.
This article was produced and syndicated by Wealth of Geeks.
Sponsored: Find a Qualified Financial Advisor
Finding a qualified financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to 3 fiduciary financial advisors in your area in 5 minutes. Each advisor has been vetted by SmartAsset and is held to a fiduciary standard to act in your best interests. If you’re ready to be matched with local advisors that can help you achieve your financial goals, get started now.