At the end of 2020, the total wealth in the stock market reached $93.7 trillion. Provided you set realistic goals, the stock market grows your wealth even while you sleep. However, you do need to keep a few things in mind to ensure that you see portfolio growth over time. Properly investing in the stock market will make you a millionaire over time. Let’s look at how you can succeed with your stock investments.
#1: Don’t Speculate Too Much
Speculative investments carry high risks, and if you wish to grow your wealth over time, it can set you back in your portfolio. Granted, you can see great rewards from speculative stock picks, but you should generally do it with only a small portion of your portfolio, like 1% or less. Many who enter the stock market don’t understand it, and they merely speculate on stocks, which can run you into trouble. Good investing isn’t about getting rich overnight. You grow your wealth slowly over time with the average rate being between 8% and 12% each year.
#2: Increase Your Cash Surplus
Many financial experts like Dave Ramsey say to invest 15% of your monthly earnings into tax-advantaged retirement accounts, like a 401(k) or a Roth IRA. Putting money into a 401(k) or a Roth IRA will allow you to grow your money slowly without tax implications. Speak with your accountant to determine the best choice for your tax situation.
Did you know that 8 out of every 10 millionaires invested in their company’s 401(k)? That should show you how important this can become to your financial future.
You see tax benefits when you hold stock for longer than 365 days. Once it hits the long-term capital gains category, you may only pay 15% in taxes. In some cases, you pay nothing in taxes, depending on your income bracket. For those who sell before the year ends, you will owe short-term capital gains tax, which varies from 10% to 37%.
#3: Keep a Long-Term Perspective
If you invest in the market long enough, you will encounter a market downturn, which scares many people into selling for huge losses as they see their portfolios dropping in value. To succeed in investing, you need to keep a long-term mindset about your financial goals. This mindset lets you look past the downturns when your portfolio drops 50% in value. Consider your risk appetite when investing and never get emotional about your investments.
#4: Set Your Account to Automatically Put Money In
Many financial experts advise you to set up your account to make automatic investments every month. This eliminates the need to be disciplined because you don’t need to worry about forgetting to put it in every month. You don’t even see the money going into your investments. That will make it easier to stay disciplined on your financial journey to wealth. Even increasing your contributions by 1% will grow your portfolio leaps and bounds when you think outwards of a 20 to 30-year career.
Let’s take the example of a 35-year-old male who earns $60,000 a year and invests 1% more than before. By the end of his lifetime, he will see an extra $85,500 in his retirement account. That’s from a simple 1% increase.
#5: Always Think of the Tax Implications
You shouldn’t avoid selling stock to avoid tax implications if you’ve gained significantly and believe the company is going downhill. However, in cases where the stock is with a strong company that you believe will continue to perform well, you may do better to defer tax payments by not selling. You only pay taxes on a stock after you sell.
#6: Get out of Debt Before Stock Investing
Dave Ramsey says you must first lay the groundwork for a successful investing journey. First, you should pay off all debt to prevent losing money to interest on those debts. You should also keep an emergency fund that covers all your expenses for 3 to 6 months. When you need to pay money on interest owed, you will struggle to build wealth because the system works against you. Also, if you invest before you set up an emergency fund, you may find yourself tapping into your investments to survive. This will ruin your financial future.
#7: Dividend Stocks or Growth Stocks?
Dividend stocks normally pay you quarterly for holding their stock. This type of stock may prove advantageous in keeping a cool head during a financial downturn. On the other hand, growth stocks may see faster growth than dividend stocks, which can be advantageous for younger demographics. Many financial advisors recommend that you invest in growth stocks when younger and invest in dividend stocks as you age for greater security.
#8: Speak with a Financial Advisor
Before you start investing, speak with a licensed financial advisor to maximize your returns. You can also use them to navigate the complex tax laws to minimize how much you owe. Especially if you plan to invest in individual stocks, you eliminate part of the risk with the guidance of a knowledgeable financial advisor. They can help you to map out your future and meet your specific financial targets. Good financial advisors will serve as a partner on your financial journey, and they will help you to understand some of the more complex investments.
Conclusion
Hopefully, this details how you can succeed with stock investments. Most investors see their stocks perform better when they hold them over the long term. This is one of the reasons that the government even encourages you to hold long-term because it lowers the risk that you will lose money. In the short term, it becomes difficult to see what a stock will do. The market can be incredibly volatile, but if you hold it for long enough, it often evens out so that you see good financial returns. The risk is still there, but it starts to go more in your favor.