Business Insider – February 26, 2021
In an interview with Warren Buffett, Jay-Z once said the music business is like the stock market. There is always the “hot thing of the moment.”
Whenever something is new and exciting, people tend to make emotional decisions based on what is hot instead of sticking with what they know. The next hot thing may not be for you, though, so you have to have the discipline and confidence to stick with your plan. Don’t get caught up in the moment.
In my opinion, the GameStop saga looked more like events that take place in a casino rather than on Wall Street. (Though I loved that it was the underdogs against Goliath hedge funds, and I gladly cheered the underdogs on.)
The nation seemed to become momentarily fascinated by the idea of making quick money instead of taking the time to understand what was happening — that regular investors were openly rebelling against the deep-pocketed Wall Street hedge funds.
The fascination with the hot stock of the moment, combined with the lack of knowledge about stock market investing, led some to steep losses.
As a certified financial advisor, I’ve been asked what I wish I could tell first-time investors who are flocking to Robinhood and other investing apps like it. I have four important tips.
1. Decide what type of investor you are going to be
There is a very small percentage of people who actually make a profit day trading, options trading, trading penny stocks, or even trading crypto. Investing in stocks, crypto, and the plethora of other options you have is an entirely different story.
Time and compound interest are your best friends when you decide to invest versus trade. It’s hard to believe, but you will likely not make more money trading than an investor who buys and holds their investments for years. As a true long-term investor, the peace of mind you get from not having to watch the markets daily, not worrying about the news, and getting to enjoy dividends and interest along the way are worth their weight in gold.
2. Don’t think short-term if you’re planning to invest, have a plan and stick to it
Stocks are an excellent way to obtain wealth without having to go into debt to do it. A little goes a long way. There are also tax-advantaged accounts, such as 401(k)s and IRAs, that will allow you to invest and reap the benefits. In my opinion, there is no better way to build your own wealth (and generational wealth for your family) than to make your money earn money for you.
It sounds easy, but the hardest part is the discipline required and commitment to being patient with the process. It means that if you see people saying they made $100,000 on Instagram from buying and selling GameStop, you wish them the best and continue with your plan. You have to be able to think independently and ignore the noise that seems to come from all directions.
Once you realize that stocks aren’t just numbers, they are businesses, use your investing plan to get what you want. When I started investing, I looked around my home and at my bank account to see where I was spending my money, and those were the stocks that I invested in. I still have them today, but I have also begun to invest in exchange-traded funds and low-cost index funds to navigate away from the risk of owning individual stocks and instead own a collection of stocks.
3. The stock market isn’t likely to make you a millionaire overnight, and even if it does, you’re gonna have to share with Uncle Sam
When you sell an asset for more than you paid for it, the result is a capital gain. The tax you’ll pay on the gain depends on how long you held the asset before selling it. The longer you hold your investment, the more favorable the tax rate.
Capital gains are classified as either long-term or short-term and are taxed accordingly. Short-term gains are usually taxed at your current income tax rate, while long-term capital gains taxes range from 0% to 20%.
4. Don’t let fear of the stock market stop you from investing
Before working with me, many of my clients expressed fear of the stock market. Fear of losing money. Fear of picking the wrong investment. Fear of being scammed. Fear around the terminology/language used by investment professionals and people familiar with the market.
All of these fears can be stopped if you take time to educate yourself. To overcome their fears, my clients have to explore their vision and values before they even open an investment account. They have to write out the companies they are considering buying and watch how the stock is performing for a few weeks.
Depending on their plan, we explore their account options so that they understand the benefits. Then they make the trades. And when the investment takes its first dip (as it is almost guaranteed to do) they don’t panic because they have the emotional intelligence to know this day might come and they understand this is part of the process.
Don’t forget knowledge is your foundation, never stop learning. This is where success will come from.
By Jala Eaton
This Business Insider article was legally licensed by AdvisorStream.
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