With all of this hard-won experience, how would these successful investors approach the market today if the slate was cleaned up and all they had was $ 5,000?
It’s like Back to the future – luck of.
Barbara Eisner Bayer: When I first started investing in the mid-1990s, I had a relatively short-term focus that was mostly based on fear and inexperience. If I made an investment and it grew rapidly – even if it was only a few hundred dollars – I would sell it and lock in the profits. No, I was not a day trader, just someone who was excited to make money and didn’t want to lose it. Boy, was I wrong!
One of the stocks I bought shortly after its IPO on May 15, 1997 was Amazon.com (NASDAQ: AMZN). However, the stock was so volatile and my stomach so finicky that I sold it a few years later. Yeah, I made a thousand bucks or so, but I missed something. If I had invested $ 10,000 at the company’s IPO price and kept my shares, I would have over $ 12 million today. Would have.
I’ve learned over the years that real wealth is created by holding companies over the long term. All growing businesses are going to be volatile in their travels – this is only part of the market OM. Growth stocks need time to, well, grow, and it doesn’t happen in a straight line. Businesses will make mistakes and hopefully learn from them. But if you understand the industry and keep your eyes on the long haul, it’s possible to turn that $ 10,000 into $ 12 million – if you don’t sell your shares.
So what would I buy today if I had $ 5,000? Why, Amazon, of course! As my colleague Sean Williams writes, “This is a fast growing freight train that no company seems capable of derailing.” Amazon controls 44% of all online sales and has over 150 million Prime members worldwide. But its major growth comes from Amazon Web Services, its cloud infrastructure segment. And the company shows no signs of slowing down at any time in the near future, especially as the COVID-19 pandemic has forced more people to shop at home – and they will likely continue to do so no matter what. he is coming.
But this time, I’m not selling it – no matter what. Because I believe that if I fast forward 23 years, Amazon will continue to grow or will have taken over the world.
At the intersection of dividends and strength
Chuck Saletta: When I first started investing, I mainly focused on dividend growth. I researched companies that paid dividends, had a habit of increasing their dividends, and seemed able to continue to increase their dividends over time. I still appreciate this philosophy, but as the dot-com bubble, financial crisis, and COVID-19 crash all taught me, dividend growth alone was not enough to build a solid portfolio over the long term.
Over time, my strategy has evolved. I am now looking for a combination of dividend growth potential, balance sheet strength and a reasonable valuation of my core investments. Also, I keep an eye on diversification while building our portfolio, as overinvesting in a company or industry can cause additional problems if it happens to be the next one to decline.
Using this combination of factors has led to a much more robust portfolio for us. For example, despite the fact that even Warren Buffett saw his dividend income hit in 2020, the total dividend in our household portfolio has the potential to stabilize or increase slightly for the year. While we’ve seen our share of cuts, so far they have been largely offset by stable to growing dividends elsewhere to accompany the compound benefits of reinvestment.
Therefore, if I started over with $ 5,000 today, I would start with a strategy that considers dividend growth, valuation, balance sheet strength and diversification as the basis of our portfolio. It would have saved us a lot of headaches and heartache in previous accidents and allowed us to be even better financially today.
Fortunately for newbies, it is much easier and cheaper to invest in this more robust way today than it was then. It’s cheaper because the commissions have largely dropped to $ 0, which reduces the friction costs of investing. Moreover, fractional investing in stocks allows investors to put a certain amount in any stock, instead of having to buy whole stocks.
And $ 5,000 can buy for $ 250 of shares in each of the 20 different companies. That’s a reasonable number of companies to form the basis of a diversified portfolio. While there is no guarantee of investing, in uncertain times like these, it is especially important to have a plan to deal with the possibility that something goes wrong.
“If you can’t measure it, you can’t improve it. “
Rich Smith: Management consultant Peter Drucker is said to have said: “If you can’t measure it, you can’t improve it”.
I have been an active investor for about a quarter of a century. Knowing what I know now, the very first tip I would give to newbies today would be: get yourself a reference. If you know where you’re starting from, you can objectively measure your performance against that benchmark over time – you can know if what you’re doing is “working”. Without a benchmark, however, all of your performance is relative.
I will be even more specific.
If I had $ 5,000 today, I would invest the first $ 1,000 in a S&P 500 ETF index fund – the very popular SPDR S&P 500 ETF Trust (NYSEMKT: SPY) for example, which measures the stock market performance of the 500 largest American companies. This would be my benchmark against which I measure the performance of all my other investments. Then I would invest my remaining $ 4000 in equal amounts of $ 1000 in four different stocks.
(If you can’t find four stocks whose prices are easily divisible into $ 1000, that’s fine. You can calculate an investment of exactly $ 1,000 by purchasing fractional shares.)
Then I would sit down and measure. A year later, shall we say, is any of my four stocks outperforming my only S&P 500 ETF? How? ‘Or’ What a lot of them are more efficient, and by a lot? Am I “winning” with a wide enough margin, enough to prove that I know what I’m doing?
If so, I would continue to save and invest more in individual stocks as I earn money. But if do not, that would suggest that I do do not know what I’m doing when picking individual stocks, and that I’d better invest new money in the S&P 500 ETF. At least that way, I could be assured of profiting from the nearly 10% average annual returns that the S&P 500 provides over long periods – without underperforming the market.