Accepting ordinary stock market returns is quite acceptable. If you invested $5,000 a year for 35 years and received a reasonably typical annual return of 10%, you’d have around $1.35 million. But what if you don’t want to fit in with the crowd? Try these seven tried-and-true methods for outperforming the typical investor.
Getty Images is the source of this image.
1. Invest automatically when the market falls.
When the stock market crashes, average investors don’t lock in super-low prices. This is due to their lack of foresight. When the market has just crashed and you’re in a panic, it’s difficult to make decisions. Plus, if you’re not planning ahead, you might not have any spare cash to invest.
Commit to investing a particular amount automatically if the market declines by a certain amount. For example, if you’re in good financial health (i.e., you’re current on your bills, have emergency reserves, and your debt is manageable), you could elect to invest $1,000 extra for every 300-point decrease in the S&P 500 index.
If you’re looking at performance over the next month or year, you might not be able to outperform the typical investor. Before it rebounds, the market may fall considerably further. Taking the guesswork out of buying following a loss, on the other hand, is a winning strategy if you’re looking to outperform the market over the next 10 to 20 years.
2. Invest in index funds as a backbone.
Make sure you’ve put yourself up to keep up with the market before attempting to beat it. Starting with low-cost index funds that invest across the stock market is the best way to go. Look for funds with an expense ratio of less than 0.1 percent. The immediate diversification allows you to concentrate on picking profitable stocks.
3. Include specific stocks in which you have experience.
Concentrate your stock picks on areas where you have some experience. That isn’t to say you have to be a software developer to buy in Apple (NASDAQ:AAPL) or Microsoft (NASDAQ:MSFT) (NASDAQ:MSFT). However, you should have a basic grasp of the company, including how it produces money and its competitive advantage. You’ll be years ahead of the ordinary investor, who invests in the same stocks as the rest of the globe based on the day’s important news.
4. Invest in stocks with a tiny market capitalization.
Finding strong small-cap companies in industries you’re familiar with can pay off handsomely for your portfolio. You’re investing in a firm while it’s still new, before the general public learns about it. The following are some indicators of a good small-cap stock:
Increasing revenue steadily, even if it isn’t yet profitable.
A significant competitive edge.
Customers who are enthralled with the product.
Small-cap stocks, on the other hand, carry higher-than-average risks. Try investing in a fund that tracks the Russell 2000 index, which invests in the 1,001st to 3,000th largest U.S. stocks by market capitalization, or a small-cap index if you want to spread out your risk.
5. Value stocks aren’t to be overlooked.
Although growth stocks get the most of the attention, value stocks can also make you a millionaire. For example, famed Berkshire Hathaway chairman Warren Buffett’s first technique was value investing, which involves selecting stocks that the market has undervalued.
Identifying value stocks isn’t an exact science. The price-to-earnings ratio, the PEG ratio, and the price-to-book ratio are three relevant indicators, albeit they’re only useful when comparing similar firms in the same industry.
6. Be a trader who only trades once in a while.
The stock market’s day-to-day volatility may provide an opportunity for frequent traders to make a fast cash. Price changes, on the other hand, do not create wealth. Focus on buying stocks you think you’ll want to own for a decade or longer to build a profitable portfolio.
7. Make a list of why you’re investing in each stock.
Make sure you have a compelling case for investing in a certain stock by writing it down. When you’re reviewing the performance of your portfolio, go over your argument again. There will always be some losers, no matter how sound your logic is. However, as you examine your underperformers, consider whether your reasoning is sound and whether there are any lessons you can apply to future investments.
Even the most seasoned investors make errors. Average investors, on the other hand, fail to learn from them.
This post is the author’s own view, which may differ from a Motley Fool premium advice service’s “official” recommendation position. We’re a mishmash! Questioning an investing theory, even our own, encourages us to think critically about investing and make decisions that will make us smarter, happier, and wealthier.
Continue reading
