Learn how to invest your stimulus check for long-term growth.
A third round of stimulus checks has arrived from the U.S. Treasury, providing at least a $1400 cash windfall for many households laid low by the pandemic. The money likewise represents an opportunity for families and individuals that have been meaning to learn about stocks to become better investors.
Access to the stock market has never been quicker or simpler.
A variety of smartphone apps
allow consumers to quickly get started. In addition, a number of online brokerages offer account services for little or no cost
, in addition to free advice. The possibilities are numerous.
Newcomers or those who have dabbled in stocks
(or “equities,” as pros call them) ought to pause to consider their financial goals before committing their stimulus checks. Depositing money in a bank savings account offers safety, convenience and a very low interest rate; currently less than 1%. At the current rate, decades would pass before $100 would be worth $200. Not the best way to generate funds to pay for a college education or retirement.
If the purpose of investing is to grow a small nest egg into a large one, the current interest rates paid by banks won’t come close to doing the trick. Buying cryptocurrencies or fractional shares of volatile stocks that started life as special purpose acquisition companies (SPACs) might score a quick win, but more likely you’ll lose all or some of your money.
The best opportunity for long term growth remains the stock market – a sound piece of advice that brings with it several stipulations and qualifiers.
The evidence for this opinion is remarkable: over the past 50 years, the compound annualized growth rate (CAGR) for the stock market (meaning all stocks) has been nearly 11%, including dividends paid. Which means that $100 invested wisely in the stock market could well grow to $200 or more in about seven years, assuming the average 11% CAGR during that period.
What are the mysterious “stipulations and qualifiers
”? The first is to ignore the general direction of the market at any given time.
Sure, buying low and selling high is ubiquitous conventional wisdom, though more or less pointless for long-term investors: Trying to guess whether a rising market will keep rising or whether a falling market will keep plunging has proven to be a fool’s game. A much better idea is to keep in mind the long-term trend of major stock market indices
such as the Dow Jones Industrial Average, the S&P 500 and the Nasdaq Composite – all three of which over years and decades have risen.
Remember this: don’t try to time the market. Instead, spend time in the market.
Spending time in the market naturally helps avoid trying to time the market and enables investors to make consistent, regular purchases of common shares regardless of what the overall market is doing. By investing a consistent amount of money
into a company’s stock over time, $50 a month let’s say, investors assure themselves of buying shares at advantageous prices, assuming the stock increases in price over time. This technique, called dollar cost averaging, is easier than ever to carry out. Even for stocks like Amazon and Berkshire Hathaway that are selling for relatively high per-share amounts, the availability of fractional shares makes dollar-cost averaging practical.
A second key stipulation to successful investing is diversification.
A good option for using your stimulus money is to begin a regimen of establishing a portfolio of 10 to 20 high-quality companies. Do this using a long term, fundamental approach that focusses on investing in a variety of different size companies in varying sectors and industries. This will provide sufficient diversification in your portfolio. (If you’re already managing a portfolio of stocks, use the stimulus money to add to your portfolio.) Another method of diversification is to invest in a mutual fund or ETF
(exchange-traded fund) based on indices like the S&P 500 – meaning that your investment will be divided proportionately into small investments in the stocks held by the fund or those comprising the index.
Selecting individual companies should be an exercise in choosing high-quality growth stocks that have a record of consistent growth in revenue, profit and, if relevant, dividend payment.
Look for growth rates that are faster than inflation or the overall economy. Understanding when such stocks are selling at a favorable price is key. To know more about the methodology
of recognizing high-quality growth companies and what constitutes a reasonable price, please explore the BetterInvesting website
for an explanation of online analytic tools
and how to access instructional videos.
Remember, some stocks will pay dividends. Others will automatically reinvest dividends, upon request, into additional shares of stock.
Some companies use their profit to grow their sales or operations rather than to distribute dividends. Investors should understand the difference while respecting the underlying principle of reinvesting
their own gains from successful stocks into further stock purchases.
The stock market contains a rapidly expanding universe of ideas, theories and principles. Some are worth knowing, others are to be avoided. Never stop paying attention to economic and financial news, practicing skills, listening for novel ideas and watching for opportunities. By applying a consistent, long term approach to investing in stocks, like BetterInvesting has taught for 70 years, investors can be assured they are properly positioned to grow their assets and improve their financial well-being.
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Doron Levin is the Editor of BetterInvesting Magazine. His lengthy career includes writing about business and economic subjects for The Wall Street Journal, New York Times, Detroit Free Press and Bloomberg. He is the author of two books and an acknowledged expert on the world automotive industry.