In Musk we trust
(How to Select Next Investment)
January 8, 2021 by The Q.ai Team
This newsletter focuses on how to select your next investment with confidence.
Us this Spring, when it’s suitable to go outside again
New year, same newsletter.
This week’s biggest headlines
- Nasdaq tops 13,000 for the first time on Wednesday. The Dow and S&P 500 also had strong days, each closing above 31,000 and 3,800, respectively. Read more.
- Elon Musk is now the wealthiest person in the world. In the last 12 months, Musk’s net worth soared to $194.8 billion after shares of Tesla grew 743% in 2020. The final boost was Thursday’s rally in which the stock closed 6.9% higher. Read more.
- Sofi announced plans to IPO amid news of a merger with a SPAC. Reuters defines a SPAC as “a shell company that raises money in an initial public offering (IPO) to merge with a privately held company that then becomes publicly traded as a result.” This deal would bring Sofi’s valuation to around $8.65 billion. Read more.
- Nvidia latest acquisition has sounded the antitrust alarms in the U.K. The $40 billion deal to acquire Arm, SoftBank’s British chip designer, has the potential to reshape the entire semiconductor industry. Naturally, whether this acquisition would give Nvidia too much dominance over the industry has been a top concern for competitors and regulators. Read more.
- Impossible Foods slashes wholesale prices as a way to better compete with the beef industry. Imagine waking up one day and thinking to yourself, “you know what? I want to take down Beef.” Not an impossible feat, but, for reference, the average price for ground beef is around $2-3 while the new price of an impossible burger is $6.80. Although the price gap is still wide, the CEO of Impossible Foods claims that this won’t be the last of price cuts. Read more.
- Unemployment is still a huge problem. New and continuing claims are nowhere near the levels seen in March, but it’s still close to what we were seeing in Q4 of 2020. Read more.
How to select my next (or first) investment
Selecting your next investment doesn’t have to be a hassle – all it takes is some foundation and a little know-how. If you’re ready to put your money into the market, consider these crucial steps:
- Know your goals and risk tolerance
- Make a plan (but leave room for change)
- Don’t forget to diversify – appropriately
- Weigh the benefits of different asset classes
- Watch for commissions and unexpected fees
- Research your investments from the top-down
- Don’t obsess over minute price shifts once you’re invested
We’ve put together a list of 7 tips to help you select your next investment with confidence. Whether you’re a first-time investor or a learned guru, these offer a great jumping-off point for your next foray into the stock market.
1. Know your goals and risk tolerance
For every goal you set, keep in mind that you need to save responsibly. For instance, if you want to buy a new car soon and can afford some loss, you may focus on aggressive growth stocks. On the other hand, a retirement portfolio should focus on slower-growing – but far less risky – investments.
Your risk tolerance plays a huge factor in your savings goals too. If you panic every time you lose 10% in your portfolio, the stock market isn’t for you. In that case, you may want to look toward certain funds, trusts, or bonds for less volatility.
Furthermore, you’ll need to consider your investment time horizon in your goals. Typically, the closer you are to your goal – especially retirement – the more you have to lose. Thus, you should limit your risk in the event of an economy-wide crash.
2. Make a plan
Once you know your goals and risk tolerance, you can start drafting an investment plan. What this looks like will depend on your goals – no two investors will have identical plans. In fact, one investor may have multiple plans for multiple accounts.
No matter what your plan looks like, it’s important to leave a little wiggle room. Circumstances and timelines change – and the older you get, the less risk you should take. You’ll need to revisit your plan and rebalance your portfolio at least once a year to minimize losses.
Keep in mind some investments will see losses (albeit temporary ones, in many cases). Therefore, it’s best to plan for reasonable growth rather than your best-case scenario.
3. Consider diversification
When you select your next investment, it’s wise to consider how that security or fund will affect your diversification. Keep in mind that goal of a well-diversified portfolio is to see reasonable growth at reasonable risk, whatever that means to you.
For instance, you may balance the high volatility of tech startup stocks against blue-chips, bonds, and real estate trusts. A more conservative investor nearing retirement, however, may diversify primarily between stocks and bonds in slow-growing, low-volatility industries.
4. Select your investment assets
Asset classes divide into two groups: traditional and alternative. The asset classes in your portfolio will determine your level of risk vs return, so it’s important to weigh your options carefully.
Traditional assets include stocks, bonds, and cash (such as CDs and savings accounts). Typically speaking:
- Stocks are the highest-performing investments of all the asset classes when averaged over time
- Bonds almost always beget lower returns, but they also come at significantly lower risk
- Cash yields the lowest return and is prone to erosion due to inflation, which eats into your profits
On the other hand, alternative assets include commodities, art, real estate, currencies, derivatives, and private equity, among others. These assets often come at a much higher risk, and their level of reward varies from asset to asset.
5. Research your investments
In most cases, you’re not just purchasing an asset, you’re buying a position or ownership in the underlying company. Thus, you should look into:
- Company leadership. Businesses with effective leadership often experience stronger growth and forge better business relationships than businesses with high turnover and shady practices.
- Dividends boost investor earnings, but not every company offers them. Keep in mind that issuing or retracting dividends does not make a company a good or bad investment, but how often they make these changes is an indication of leadership and their financial prowess.
- Debt-to-equity ratio. This number tells you how much debt a company has against the total value of shareholder equity. How much debt is appropriate varies by industry, so be sure to compare apples to apples in your research.
- P/E ratios. Simply put, ratios tell you how much an investor will pay for business earnings over the course of a year. For instance, a P/E ratio of 36.12 says that an investor will spend $36.12 per $1 in earnings. P/E ratios serve as a vital indicator of stock value and future expectations. Once again, though, be sure to compare apples to apples.
- EPS: EPS, or earnings per share, is a dollar figure of how much each share of common stock is worth. Typically, a higher EPS leads to higher share prices; as such, this number is good for analyzing earnings estimates.
6. Keep an eye on commissions
If you think you’re ready to select your next investment, don’t forget to check out the fees. Buying into funds can be cheaper than purchasing individual stocks upfront – but it’s still not free.
Not to mention, annual charges can eat into your growing profits over time. For instance, a 0.5% fee on $100,000 comes to $10,000 over 20 years.
In the same time frame, a 1% annual fee will cost you nearly $30,000 – that’s three times the price for double the percentage.
Thus, it’s crucial to be on the lookout for investing and management fees, the cost of financial advice, and commissions on trades. Make sure you do your due diligence researching relevant pricing structures and hidden costs.
7. Once you’re in, don’t obsess
If you’re a nervous investor, it may be a good idea to avoid “stock watching,” or obsessing over the market. Slight variations, and even significant losses, are unlikely to hold in the long term. And research shows that obsessing over your investment portfolio leads to more frequent trades and poorer returns.
The only way to see returns from smart investing habits is to keep investing – if you pull out, your money may be “safer,” but you’ll lose value to the corrosive effects of inflation.
Not to mention, you’ll never feel the joy of making interest on your interest on your capital.
The bottom line
Make a plan and stick to it! Unless you’re a day trader, the fact that Apple is down 5% this week means nothing for the value of your portfolio next year. Keeping these tips in mind will help you stay on track with your individual goals.
This week we fall victim to *shameless self promotion.*