Investing in stocks and bonds could be a great way to make money, especially over the long term. But even amateurs know that it’s risky to invest in these assets, and a few bad plays could have you losing money.
Experienced investors understand the risks and can avoid them with agility. They seem to reliably turn a profit, even in bear markets when stocks are notoriously low. But what about inexperienced investors? Are they doomed to fail and lose money? Or is there a way that they can consistently turn a profit?
The Basics of Stocks and Bonds
Let’s start with a basic assessment of stocks and bonds as investment options.
Stocks each represent a fractional share of ownership in a publicly traded company. Buying one share of stock means you become a partial owner of that business, though your fraction of ownership will be so small that you probably won’t have a direct say in how the company is run.
Ideally, the company will be successful, so people will be willing to pay more money to own shares of that company; this increases the price per share over time, and allows you to sell your stock at a later date for a profit. Additionally, many businesses distribute profits in the form of dividends to their shareholders; if this is the case, you can capitalize on a stream of income while you continue holding shares of stock for this business.
Bonds, by contrast, function almost like a loan for a business or a government institution. You’ll be buying bonds to make your capital available as cash to the institution issuing the bond. In exchange, you’ll be paid a fixed interest rate on the principal you’ve lent. Bonds tend to have a lower overall return than stocks and other asset classes, but they tend to be very stable and reliable, especially if you choose the right bonds, issued by credible institutions with good credit ratings.
Is It Hard to Turn a Profit?
Knowing this, is it really that hard for inexperienced investors to turn a profit?
That depends on the approach an investor takes. Historically, the stock market has risen in price consistently once you zoom out and look at a long enough time horizon. Assuming you’re invested in a wide variety of different stocks, and you remain invested for a number of years, it’s almost guaranteed for you to see an increase in your investment portfolio’s net worth.
Bonds, too, are extremely reliable. Unless you’re buying junk bonds, you can rest assured that you’ll make your principal back plus the interest rate you were promised at the beginning.
Obviously, this doesn’t mean you are guaranteed to turn a profit. Many investors every year end up with losses because of poorly timed strategies or broad market downturns.
Strategies to Maximize Your Chances of Success
If you want to maximize your chances of seeing a profit in your first few years of trading stocks and bonds, these are the most important strategies to have on your side.
· Diversify your portfolio. This is one of the most common pieces of investment advice for a reason. Holding many different types of assets at once in your portfolio is a great way to minimize the chance of a catastrophic loss; even if one of your asset classes undergoes a dramatic downturn, you’ll have plenty of other asset types to make up for it. On top of that, you’ll see much more stable returns if your assets are distributed. Make sure to invest in a variety of different stocks, a variety of different bonds, and other asset classes like real estate.
· Choose companies with a great reputation. Prioritize filling your portfolio with shares of stock in companies that have a great reputation. Companies that have been around for decades and have always had great customer service are likely to be around for several decades to come. Additionally, you can choose to invest in exchange traded funds (ETFs), which allow you to invest in many different companies simultaneously.
· Remain patient. Remember, profitability is best captured over the long term. You have to remain patient if you’re going to get to that point. Don’t let a sudden downturn during a single trading day shock you into selling all your holdings; weather the storm and keep executing your strategy consistently.
· Keep learning. There are always new things to learn about the investing world, so keep an open mind and keep acquiring new knowledge and new skills. It’s also important to recognize your trading mistakes and learn from them.
It’s not only possible, but likely for newcomers to be profitable when investing in stocks and bonds, assuming they have a calculated and well-considered approach. There are many risks associated with investing, and it’s your responsibility to be aware of them.
That said, the most important strategies are relatively easy to understand and can help you walk away with a positive outcome even if you’re inexperienced.