Most American investors who dive into stock trading begin with a 401(k) investment strategy. Over 60% of workers in the US who choose another strategy are offered a plan similar to 401(k). However, intelligent traders invest outside of this plan to build their wealth.
Here are five investing strategies you could consider as you increase your involvement in the stock market.
Open an Individual Retirement Account.
Most employees have an employer-sponsored plan. However, this is not enough. The next step you should take as a smart investor is to invest in other investment accounts like an Individual retirement account with an online brokerage company.
Opening a brokerage account doesn’t mean that you begin investing immediately. Most online brokers do not even require an account minimum when you open an account. And so you can access the stock market and begin to invest when you are ready to start.
If you are a young investor, you can contribute up to $6000 per year in stocks and $7000 if you are older. However, before you have a hang of the trade, it’s not advisable to invest more than $1000 of your portfolio. You can opt to invest in your retirement account or an employer-sponsored plan, depending on your preferences.
Explore Passively Managed Index Funds
As an investor, you need to create a balanced portfolio at the least minimum cost. Most stock investors opt for index funds, mutual funds, and exchange-traded funds to achieve this balance. And why not? This is an intelligent move because traders do not bet on one company stock, in which case you would lose a lot if not all of your stock in case of a down-turn. The index, mutual, and exchange-traded funds pool multiple stocks together and balance out the ultimate winners and losers.
Moreover, these stocks are built on passive management strategies, which only aim at matching broader market gains as opposed to active investment, which strives to outperform the market by buying and selling stocks more frequently.
You could also hire an expert to choose stock for you before gaining the necessary knowledge and expertise to trade. You also stand a chance for fewer fees with passive rather than active funds with passive investment. The more fees you accumulate, the more you erode long-term investment growth. Due to the cost difference, many companies are opting for automated portfolio management rather than actively managed accounts.
Invest Cash You Do Not Need in the Short Term
One of the most significant drawbacks of traditional retirement accounts is that you could be liable for tax ramifications and penalties if you withdraw funds before you reach 59 and a half years. Roth IRAs are a little more lenient than employer-based retirement plans in that you are only taxed or penalized for pulling investment earnings early. However, this plan does not offer tax advantages.
It would be best if you kept in mind that at any one time, it would be pound foolish to invest in cash that you need within five years. It would be best to be patient when investing in stock because patience ultimately pays when you weather the market through thick and thin.
If you have idle cash sitting in your bank, opening a taxable brokerage account is advisable, especially if you are maxing out of the 401(k) strategy or an IRA.
Limit Your Stock Investment to 10% of Your Portfolio.
When buying stocks, especially if you are a beginner, try to limit your investment to 10% or less of your total investment portfolio. Moreover, try to work with passive marketing strategies because actively managed stock market strategies that strive to beat the market often underperform passive strategy. Investing in one stock could be risky because a single public relations disaster, a new unfavorable regulation, or a new competitor could threaten the investment.
Before you engage in active trading, ensure you have gotten enough simulators that allow you to practice trading and gathered enough knowledge from educational tools.
Use dollar-cost averaging.
Most active investors strive to buy low and sell high. But that’s often not easy. Therefore, dollar-cost averaging is recommended for making a new investment at regular intervals compared to buying low and selling high.
For successful investors, it’s more about giving enough time for a broad portfolio to grow rather than timing the market for buy low and sell high opportunities. Make the right investment choices right from the beginning.