If you’re thinking about investing in stocks right now, you’re probably wondering what’s the best way to invest in stocks during a pandemic.
Here’s what might surprise you: The stocks you should buy during the coronavirus aren’t really that different from the stocks you should normally buy.
but let’s go back to basics for a second. Investing in stocks is one of the most important financial skills to master. On average, stocks have given an annualized return of around 10%. at that rate, your money doubles every 7.2 years.
Let’s say you start with $10,000. after a 40 year run that converts to at least $320k by doubling 5 times. that’s from a single investment of $10,000.
I’m going to level you up. You can’t get rich on your salary alone. savings and bonds won’t either, the yield isn’t high enough to have an impact over your lifetime. actions are the key.
Regardless of your income, you will get rich in stocks as long as you start investing early, keep investing, and never sell.
anyone can do this. You don’t need to be a financial genius, have access to inside information, or a lot of time. I spend a few hours a year managing my portfolio. time and constant contributions will make you a millionaire.
That’s why I’ve compiled a list of easy things you can start doing today to make money in stocks. let’s get into it.
how to make money on stocks at a glance:
- two rules for making money with stocks
- stay invested in the stock market
- stop timing the market
- how to select individual stocks
- automate your investments
2 rules to earn money on stocks:
The quicker you realize the stock market isn’t sexy, the quicker you’ll start making money from it. For 99.9% of people, investing in stocks is nothing like what they saw in The Wolf of Wall Street. It’s also not listening to so-called “financial experts” on the news channels and buying their best stocks of the season.
that’s all noise. it will not help you make money on stocks. Successfully investing in the stock market is about being patient and staying in the market for many years.
Which brings me to…
Rule #1: Stay Invested in the Stock Market
It is very easy to panic and sell stocks every time there is a big drop in the stock market. however, selling your shares at the slightest drop or when they are down could be the worst financial decision you can make.
When markets fall, everyone talks about the next recession or that things are going to get worse. I get it. downtrends are scary. but remember that they seem worse than they really are because of how much they are discussed and analyzed.
When you panic, first of all, take a deep breath.
since 1900, we have seen some real disasters, there have been many reasons for the market to fall and not rise:
- great depression
- world wars 1 and 2
- cold war
- 9/11 terrorist attacks
- asian financial crisis
- dotcom bubble
- 2008 recession
Despite all this, the markets have continued to grow at a rate of around 10% per year.
Here’s another fascinating stat that I love. In the months after a 10% drop since 1900, here’s how much markets have risen in the immediate future on average:
- 1 month: -0.1%
- 3 months: 7.5%
- 6 months: 11.1%
- 12 months: 14.6%
what does this tell you?
The stock market has always gone up every time it went down. so don’t be scared when it goes down. Trust how stock prices have always behaved. in fact, when they go down, try to buy more shares.
rule #2: stop timing the market
gosh, I’ve heard of people trying to time the stock market so many times.
- “I am waiting for the next drop before I buy”.
- “I wouldn’t invest now because the stock market is too expensive”.
- “I sold my shares markets hit an all-time high.”
everyone tries to buy low and sell high. even financial advisors always try to time the market.
Being able to constantly identify the ups and downs is a very difficult skill. even people who have spent their entire lives trying to master it can’t. it’s impossible to do it consistently.
Guess what the most likely outcome is when the stock market hits a new high? Taller! by waiting, you lose more profit.
The same thing happens when times are bad. the biggest gains come after the biggest drops. if you try to wait for the market to be “all clear”, you will miss them. and it won’t come close to that 10% annual return.
Here’s something very few people know about the stock market.
a 2020 study revealed findings that will blow your mind. found that if he hadn’t invested in the market during the best 10 days (the days when the market rose the most) of the stock market between 2004 and 2019, his returns would have dropped by a staggering amount. For example, this is how a $10,000 investment would have grown in that period if there were:
- Stay invested every day: $36,418 at 9% annualized return
- Missed top 10 days: $18,359 at 4.15% annualized return
- missed top 20 days: $11,908 @ 1.17% annualized return
- missed top 30 days: $8,150 @ -1.35% annualized return
- lost top 40 days: $5,847 with an annualized return of -3.51%
Missing just the top 10 days cuts your earnings by more than half. if you missed the top 20, you’re about to break even (in fact, you’re losing money due to inflation).
Trying to time the market can be devastating. ignore the news and invest every month like clockwork. that’s how you make more money.
the best way to invest in stocks
They are the best way to make money in stocks. index funds put their money in indices like the s&p 500 or russel 1000. index funds are passive, their fund managers don’t keep buying and selling stocks to “beat the market.” in fact, your goal is to be the market.
A lot of research has shown that active fund managers fail miserably when trying to beat the market. in fact, more than 90% of actively managed funds fail to outperform the index. so the index fund approach ends up performing better. they also have less risk since you are exposed to the entire market. if some random company implodes and shares drop to $0, it doesn’t matter.
They’re also much easier to manage, so the fees are lower. taxes are also lower since fund managers aren’t buying and selling all the time.
index funds really are a free lunch:
- lower costs
- better returns
- lower taxes
- no effort
- less risk
You can also easily diversify through index funds. by nature, they help in diversification, but you can go one step further. You can choose some index funds from US stocks, international stocks, and bonds. A lazy wallet like this gives you many advantages and low risk that is very easy to manage.
I recommend making at least 90% of your portfolio through index funds.
how to choose individual actions (if necessary)
I understand that you will want to buy individual shares.
but I’m not going to sugarcoat it. buying stocks is brutally difficult.
The odds of successfully choosing individual stocks are very low.
From 1926 to 2015, there have been 25,782 different actions.
During these 90 years, the stock market increased in value by $32 trillion. half of the profits came from just the top 86 companies. 86 out of 25,728! the remaining wealth was generated by the top 1,000 shares. that’s only 4% of all companies.
The odds of success buying individual stocks are very slim. only 4%.
This is why I recommend using only the remaining 10% of your investment capital to purchase individual shares.
I pick some stocks myself, but keep them well below 10%. I can scratch my stock-picking itch, eat a bunch of humble cake, and then get back to my day.
Have fun with 10% of your portfolio, but don’t go any further. keep the other 90% really boring. you will earn much more money.
Pro Tip: If you’re really smart, instead of investing in individual stocks that have very little chance of success, you can use that remaining 10% to invest in yourself. you may see even higher returns when you invest in your career or in a business. moreover, when you invest in yourself, your earnings are not capped at 10-15%. instead, you could earn 1000% or more.
automate your investments
I’m a big fan of investment automation. log in to your investment accounts and set a specific amount to be automatically transferred each month
Automation accomplishes three purposes.
first, you are not trying to time the market. investing each month allows you to average your gains and losses. it also makes returns smoother. When you invest each month, if the market is up, your portfolio continues to grow. if the market is down, you are buying shares at a comparatively lower price that will eventually go up.
Second, don’t forget to actually invest. By setting up auto-invests, you’re really adopting a “set it and forget it” strategy. you are not trusting yourself to invest. We all forget to do things. With investing, forgetting to invest will rob you of more returns than any recession. don’t rely on willpower or memory, automate it so you never have to worry about it again.
Third, you can spend freely on the rest. By setting up an automatic transfer to kick in right after you get paid, you’ll never feel like you have the money in the first place. set up transfers for your investments and savings, set aside enough money for major bills like rent or a mortgage, then spend the rest freely until the next month. You have done the hard work of taking care of your future by setting up auto investing, now enjoy your rich life. automatic investments allow you to enjoy the present while securing your future. you can have it all.
the first step to earn money through stocks
Armed with this new knowledge, you are in a great position to make money in stocks.
The first step is to set up a brokerage account to buy stocks or index funds. we recommend vanguard, td ameritrade or fidelity. all are excellent options to open your first account.