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Stock investing, when done well, is among the most effective ways to build long-term wealth.
Here, I’m going to share two secrets that can contribute to increasing your profits in Stock Investing!
1. Keep a reserve of cash
When building a portfolio of stocks, a good practice is not to invest 100% of your capital right away because negative periods for the stock market happen.
The S&P500 is a market index that includes 500 of the largest companies quoted in the US market.
If we use it as a benchmark, we can say that, on average, the market falls by 10% or more once every 21 months.
It falls by 20% or more once every 9 years. Down-movements between 5 and 10% happen almost every year.
While most people panic during these periods, I would like you to be prepared with a smart approach.
My suggestion is to invest only part of your account in stocks. The other part will be used when we have negative periods in the stock market, so we can buy stocks at a better price.
Think of it like going shopping. Sure, you can find good opportunities during the year and buy some clothes that you like, but it would be convenient to have some money left for the Black Friday or the Christmas sales, so you can make some good deals.
My recommendation is to allocate only between 20 and 80% of your account to buy stocks. Save the rest for when we have strong down-movements or even market crashes, which allow you to buy stocks at much lower prices.
At the time I write this article, the S&P500 is down by almost 20%, while the NASDAQ hit -30% just the previous week.
Imagine if you had invested only 50% in stocks and had another 50% to buy more stocks. That would be amazing, as you could use that money to buy stocks at much lower prices!
Now, you may think: “well, between 20 and 80% is a bit vague. There is a huge difference between 20 and 80, can you be more specific?”.
In the Smart Stock Investing and Stock Trading Foundation Course, I go into the details of it, so you can start your portfolio at the best!
So, if you invest only part of your money into stocks, what should you do with the rest of it? You can hold the funds in your account, or you can have it in a bank current account or a savings account, especially if it pays good interests. You can invest that part in assets that are considered less risky, such as government bonds, for example. Just make sure that you have it ready in case of a fall in the stock market, so you can take advantage of it.
2. Regular investing
What is regular investing? It is when you deposit a certain amount of money in your portfolio, on a regular basis, regardless of market performance or the strength of the economy.
Simply adding $100 a month to your portfolio of stocks is an example of regular investing.
How can regular investing make a difference in your portfolio over a long period of time?
Let’s have a simple example to illustrate how powerful this strategy can be.
John starts investing with $500 and he can make a return of 50% a year but doesn’t have another source of income, so he doesn’t make any recurring deposit.
Joy starts with the same amount, makes the same return a year, but she can save $200 a month off her salary and put it in her trading account.
After 10 years, John has $31,032, while Joy has $379,971.
An impressive difference!
Now, maybe we are not going to consistently make 50% a year, but the power that regular investing generates over a long period of time is still huge.
You can generate different case scenarios playing around with the calculator on this website: https://www.thecalculatorsite.com/finance/calculators/compoundinterestcalculator.php
Having a reserve of cash and making regular deposits can drastically increase your profits in Stock Investing, especially if you are planning on holding your stocks for a long period of time (I would say at least 10 years).
I use the same approach on my portfolio on eToro: https://etoro.tw/3uSrHPY
I also give regular updates about the stock market and my investing activity, so consider clicking on the follow button on eToro if you want to have real time updates.
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