I began my investment journey which I feel most people start is day trading. Mostly trading bio-tech stocks playing hype and FDA approval dates. The profit came and went, grew and diminished. I quickly learned it was very time consuming with a full time job and renovating my fixer upper house, so I switched to swing trading. Leveraged ETF’s (exchange traded fund) which have swings holding for a week or two didn’t seem to have the great payoffs I was looking for not to mention extremely volatile. Eventually I realized that compound interested and dividend investing was the right strategy for me.
Diversifying in strong companies/ETF’s with a good dividend history are the way forward to amass great amounts of wealth over the long run. An ETF is a ticker that holds assets such as stocks, commodities, or bonds which can be a variety of different companies or sectors. The great thing about dividend investing is whether or not the stock you buy is rising or falling you get paid regardless, as long as the company you’re invested in is in good standing and still paying a dividend. My personal favorite and safe suggestions are the Dividend Aristocrats/Kings. These are companies which have increased their dividend payout consecutively for 25 years. Dividend Kings are a select few companies who have increased their dividend payout consecutively for 50 years! A huge feat when we’ve looked at the history on stock crashes and bear markets. Companies in these categories have a high chance of still being around in the future which is why I like them. As long as you have stock in these companies you are getting paid. Another options and a way to diversify are REITS which stands for Real Estate Investment Trusts. By law these stocks are required to distribute 90% of it’s taxable income to the shareholders. These work in the same ways as a dividend, but they are taxed a little differently.
The effects of DRIP (dividend reinvestment plan) is critical to amassing great wealth over time. Most brokers have this option and you can choose to opt in or out. These dividends which you are getting can be reinvested in themselves to increase shares which in turn increase the dividend payment you’re receiving. The long term effects work as compound interest and will continue to grow and prosper for the time you own the stock. Great stock picks also grow in value over time which increase your wealth as well. The combination of stock growth with DRIP are critical in my strategy.
Let’s talk about diversification. You wouldn’t want to throw 100% of your capital in one company for the fact that if it goes under you lose everything. Owning stock in a bunch of sectors could prevent you from this huge risk. To use the saying “don’t put all of your eggs in one basket” is key. There are essentially two ways or a combination of both you could go about deciding your stock picks. You can invest in companies of different sectors, or you could pick ETF’s which are either already diversified in that sector or are a group of companies in that sector. Keep in mind for ETF’s there is usually a management fee, but fortunately it’s usually pretty minuscule. At least in this bear market I have chosen a combination of both since they’re sectors that have taken a huge beating for (my opinion) no reason besides panic selling. My financial mentors have said you should only own around 15-25 stocks that anything more is overkill. Huge investors like Warren Buffet only have a few (usually under 10). I prefer diversified ETF’s so I can put larger capital in each and still benefit from diversification. To each their own, choose your style and strategy you feel most comfortable with both have been proven to be successful. I myself currently have 9 stocks, but will probably add a few more based on the current market.
Always invest with a margin of safety. This means use your indicators and different resource strategies to heighten the chance your picks will be successful. Winners or losers getting involved early will teach you the major fundamentals which you can improve your own strategy. If you’re not an active trader that’s completely acceptable, but you should re evaluate your picks at least once a year. Paper trading is a fantastic way to get started, but for me without skin in the game it had no real value. If you really want to learn the system and get started I would buy at least 1 share in each company you would like to invest in. Creating a good watch list and alerts on tickers you’re interested in can also be a solid game plan before heavily investing.