Stock market euphoria is everywhere. You can’t lose. Money is falling from the sky. Any investment is a good investment. Wait….what?
Yes, the stock market is in a huge bubble. Is this the end of the bull market run? No one knows. This bull market could last another 10 days or another 10 years. With the stock market reaching all-time highs almost every day, how should we invest? What should we invest in when prices are so high?
In times of great euphoria, it is important that we keep the mindset of an investor. Investors and traders are totally different and have opposing mindsets. A trader is in the market for short term capital gains. They want to get into a position, wait a few days or weeks, and exit the position, ideally with a profit.
5 Takeaways from “The Intelligent Investor”
An investor is always looking for long term plays. An investor is evaluating each stock as a unique business. Their first concern is the health and management of the company. Next, they want to evaluate the long-term prospects of the company. Finally, they look at the current price and make a buying decision.
This is called value investing. The price of the stock is secondary to the value of a stock. In the end, you want to build high-quality stocks for large discounts. This is the job of an investor.
A trader is buying a stock with the intention of waiting for someone to buy it from them at a higher price. If you invest in Pokemon cards, you are waiting for someone to buy them from you at some point. That is the only way to receive a return on your investment.
5 Takeaways from “How to Retire on Dividends”
Now that we have decided to invest as investors do, let’s start building our mindset. This is a 5 step process. Using this process will help you build wealth over the long term. It is not a get-rich-quick scheme. Building a portfolio that achieves 7-10% capital appreciation plus 4% dividend income would be a huge achievement. That’s is what I aim for.
1. Create a balanced portfolio. Before you put money into the stock market, have a plan for your overall total portfolio. This includes money outside of the stock market. I like to have money in high-yield savings, bonds, real estate (via Fundrise), and cash. Right now I have about 25% of my investments outside of the stock market. I also have a government job. Your risk tolerance may be different.
The main idea is that when (yes, when) the stock market declines, you won’t be in a hurry to sell your stocks. You will have other money on standby for these times.
2. Stay level-headed. This may be the hardest part for most people. Have a plan of how you invest. At some point, especially during the end of bull markets, there will be all types of fast money to be made on the stock market. In January 2021, we witnessed the short squeeze of GameStop. During this amazing run, the price rose 1700% in a week.
These are not the type of plays that we want to get involved in. As a retail investor (read: regular person), by the time the news gets to us, the real money has already been made. Always remember this.
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Our job as investors is to keep our investment strategy the same. Invest in solid companies. At any given moment, we should know the reason we invested in any of our companies. We only need to sell if the unlying investment thesis has changed.
To have a little fun, investors can allot 10% or less of their money to speculative plays. This is so we can get some of the euphoria without going all in. Hey, everyone wants to have a little fun. I have about 5% of my investments in speculative plays.
3. Dollar-cost average. The best way to continually make money on the stock market is to dollar cost average. This is putting a set amount of money into the stock market, at a set arranged time. For instance, $200 every Monday. There are multiple advantages to dollar-cost averaging.
Stock Market Investing 101
First, you are buying the right amounts at the right times. You are buying more stocks when the prices are cheap, and fewer stocks when the prices are high.
Second, you do not have to look at the market. Trying to invest in the market is extremely hard. If we have $200 every week, and we are trying the find the best deals, it may not be easy. It is like trying to pick a movie to watch on Netflix. However, if we automatically deposit money into our stock market account, then the job is done for us.
Lastly, the investment apps do all the heavy lifting for us. Cash App, Stash, and M1 Finance all have automatic transfers and investing. You could go months without looking at your portfolio. We all should want to get to this point because it saves us from ourselves. An important stock market saying is “Your portfolio is like a bar of soap in the shower, the more you touch it, the smaller it gets.”
Rich Dad’s Guide to Investing
4. Build a shopping cart. This is the fun part. As we are doing our due diligence by researching the stock market, we will come across get investment opportunities. We may not have the capital to invest or the prices may be too high, but this won’t stop us from window shopping. We can put those into our shopping cart, overwise known as our watchlist. You can also build a watchlist on places like www.seekingalpha.com and www.yahoo.finance.com. It is good to have a watchlist ready and waiting for the right time.
5. Wait for a sale. This is where everything comes together. We are waiting for a fire sale. We are still dollar-cost averaging. We have our watchlist prepared. Now, we get the word that the stock market dropped 10-20%.
Dividends vs Capital Gains
Now is our moment. Not only can we double down on our normal dollar-cost averaging investments, but we can buy from our watchlist. We can slowly buy into the market drop.
Most people will be trying to exit out of the market at this time. Great! We have the resources to buy more. As a dividend investor, our dividend yield on cost will skyrocket. This means that we are getting great companies at great prices.
Those are the 5 steps to build your mindset as an investor. Let’s go over a quick example of how this can play out in a normal situation.
Introduction to R.E.I.T.s
McDonald’s (MCD) is one of my favorite companies of all time. It has great food and a great dividend. As of now, I plan on investing in McDonald’s forever. For this example, let’s assume MCD costs $200 and has a dividend of $5 for a dividend yield of 2.5%. I dollar-cost-average into McDonald’s on a weekly basis. This is my standard investment thesis on McDonald’s.
I know when the time comes, I am going to go all-in on McDonald’s during a sale. Lo and behold, the market drops the price to $130. This would make the yield 3.8%. I decide to buy 20 shares at this price.
I not only get the MCD shares at a great price, but I also get a higher dividend yield. Then, for even more icing, I get to watch as the price slowly recovers to $200 and beyond. These are the benefits of buying a great company at a great price.
Being an investor takes patience and planning. There is no “free money” as an investor. Each “hot tip” that you receive is hard-earned from time and research. In the end, staying calm and consistent will lead to great wealth.
We are in another time in history where the “fast way” seems like it is winning. Becoming a trader is very seductive because there is a lot of money on the table. Fight the urge to trade and become (or stay) a long-term investor. These are the moments that will make or break many careers, investments, and lives. Will you resist the urge of easy money and build the mindset of an investor?
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https://www.pinterest.com/kingmarine/military-family-investing/Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.
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