If you are a first-time investor, 2021 may be the year that convinces you to jump in and see what is out there. A lot has changed in our world due to the recent pandemic and all we’ve had to deal with. Investing is a great way for many people to build wealth during these troubling times. And while even the stock market has seen some changes, it is still possible for the discerning investor to find some solid opportunities.
The trick here is not to jump in where all the noise is. Likely, the stocks you hear about on the news and social media are either hyperinflated or near the top of their value already. You want to find some of the lost players, the ones that are forgotten but will come back with a vengeance once the pandemic is over. These will help you get stocks from a great company for an affordable price, and you can hold onto them until you make a profit.
📘 Learn the basic principles of investing: Investing 101: Investing For Beginners
The Big Picture
2020 was a very strange year for the markets. Usually, stock markets do well in high growth periods and lose ground during recessions and periods of high economic stress. In 2020 markets and the economy decoupled: even as the economy suffered under the impact of COVID-19, stock markets roared to record highs.
It’s not clear what that means for 2021. Some analysts believe that as the pandemic comes under control, markets will push even higher. Others worry about the possibility of a market plunge as valuations of popular stocks reach unsustainable highs.
If you’re a first-time investor, don’t let these short-term uncertainties deter you. The basic recipe hasn’t changed: look for high-quality investments and hold them.
☝️ If your investment is a minimum of 5 years (as it generally should be) and possibly 20 years or more, whether markets fall this year doesn’t really matter! Investment is a way to build long-term wealth, not a way to make a quick buck.
Look Into Dividend Investing
You can earn money even in uncertain times and even if you’re a first-time investor. Dividend investing is a great way to do this.
Dividend investing is investing in stocks that pay dividends. A dividend is when a company shares a percentage of its profits with anyone who owns its stock. If you own stock in a company that pays dividends, you can earn a small income from that each year. The amount will depend on how much the company made in profits and how many stocks you own.
Most companies pay a fixed dividend amount per share. That means that when the stock price falls, the dividend yield – the percentage of your investment that you earn back from the dividend every year – rises. Even if the stock price goes up, your investment still earns that high return on investment, because the amount you invested remains the same.
Well established dividend-paying companies are often considered “defensive” stocks, because when markets fall the dividend yield goes up. That yield attracts buying from income-oriented investors, which supports the stock price.
One solid strategy for market gains is to look for market sectors beaten down by events and buy the strongest companies in those sectors. Events are cyclical, and when conditions change, the strongest companies in those beaten-down sectors often see substantial gains.
This is not one that will make you a ton of money right now, but it could help you earn a good profit if you are willing to wait. When the pandemic hit, many states closed things down and traveling pretty much went to a standstill. No one was traveling, so the value of these companies quickly went down.
While many parts of the country are now reopening and the price of those stocks has gone up a little bit, many people do not want to travel and may feel that way for a long time. However, as the pandemic runs its course and people can go back to work, the travel industry will experience an increase again.
It is hard to know when that will happen, of course. But we know that it will happen, especially for the stronger companies. You can get into the market, purchasing stocks of these companies at really low prices. Later, when more people feel comfortable traveling again, the stocks may go up.
Stay at Home Options
At the beginning of the pandemic, companies like Zoom went through the roof. Schools relied on these services to help continue educating young children, which helped people across the world connect when they could not be around one another.
Since that time, many companies who make staying at home easier have seen their stock prices rise. Walmart and Amazon have grown because they offer delivery and pick-up services that are convenient and allow people to stay at home. Netflix saw huge increases in profits as more people signed on for something to watch.
In 2021, it is likely that other companies are going to join in on this idea, providing services that make life easier, especially for those who want to stay home to avoid the pandemic. It’s also likely that people who have gotten used to the convenience of remote business during the pandemic will continue it even when the pandemic ends. Finding these companies and getting in on the ground level can be a good way to make money in investing in the next few years.
Remember the Basics
The idea of analyzing companies and business sectors can easily intimidate a first-time investor. One of the best and simplest ways to start investing is with a low-fee index fund. These funds are available as either mutual funds or exchange-traded funds (ETFs) and simply track major market indices. Because their mission is so defined, there’s little management involved and the fees tend to be low.
Investing in index funds could be considered risky at a time when major indices are at all-time highs, but over the long term, market index values have always gone up.
If you like the idea of investing in market sectors hit by the pandemic but don’t want to look for the strongest companies, consider sector-specific funds that are focused on sectors that have been hit hard.
☝️ Remember to check the fees: these funds will be more actively managed, and fees may be higher.
Mutual funds provide instant diversification with even a small investment, making them a great tool for a first-time investor.
Things to Remember as a First-Time Investor
There are a few important factors that a first-time investor in 2021 should keep in mind.
The Outlook is Still Uncertain
There is a lot of uncertainty in the market right now. Some experts believe that there will be a recovery soon, and things will get better. Others warn that there may be some time before we see any signs of recovery and that a recession is still possible. The biggest factor in which way things will go depends on how Covid-19 plays out, and no one can predict that.
Most analysts agree that the economy will get better eventually as COVID-19 clears out and people get better. Whether we will see that soon or it will have a recession first is uncertain. This is why first-time investors should be wary of committing their funds and hoping to get money back right away. You need to be willing to tie up your funds for at least five years here. The economy may right itself before then, but going in with this mindset will give you better results.
💡 If there is a recession and markets do plunge, remember that a deep recession is one of the best times to invest in index funds. If you had invested $1000 in the S&P 500 index in 2009, at the trough of the last recession, you’d have over $5000 at the start of 2021 if you reinvested your dividends.
Interest Rates are Low
Interest rates are very low right now, and they will likely stay low for the foreseeable future. That’s a good thing if you’re applying for a mortgage and not a good thing if you’re looking at fixed-income investments. Options like municipal bonds and treasury bonds, while generally safe, are not very attractive for a first-time investor. You will barely make anything off them because the interest rates are just too low. As of February 2021, the 10-year Treasury bond is yielding only 1.14%.
If you want to focus on income-generating opportunities, then you should pick something else. Dividend-bearing stocks are a good option. These provide you with money back from the company each quarter based on their earnings during that time. Finding a dividend-bearing stock that is generally strong, but which was hurt during the pandemic is a good place to do this. They will have affordable stocks with good dividend yields and are likely to spring back in the next few years and make a good profit.
Watch Out for the Hype
Hype is never your friend when it comes to the stock market. Usually, by the time you hear about these stocks, everyone else has as well. You will pay way too much for the stock and end up losing money in the process. Avoid the hype and go the opposite way if you can.
A good recent example of this is GameStop and AMC stocks. Reddit users decided to drive the price of the stock up by purchasing large amounts of it. By the time the news broke, others wanted to jump on it as well and ride it all out. However, by the time most of these investors heard about it and jumped on, the wave was over and they paid way too much for a stock that could only go down in value.
This brings us to another point; you always need to do your own research. Falling for hype is just going to leave you paying too much for stocks that are not worth it. Your goal is to find stocks from strong companies at low prices. Consider companies that have historically performed well but have fallen flat over the past year because of the pandemic. Consider whether they will be able to recover. If they are strong enough, they will recover. And you can snatch up a bunch of their stocks for a good deal, try it.
👉 The goal is to buy low and sell high. If you buy popular, high-visibility stocks at peak value, it’s hard to achieve that goal.
Be Ready to Go Long Term
The safest approach to the stock market is to invest in high-quality stocks and be prepared to hold for the long term. Do not grab a stock and assume you will make your millions in a few weeks or even months. If you decide to invest in the stock market, get ready to commit money for at least the next five years. This strategy will pay off if you have the patience, but it is hard to stick it out if you expect quick returns.
Many investors worry that right now is not the right time for them to invest at all. It can seem a little tricky to get into the market right now because the pandemic has really hit a lot of companies, even good ones, hard. That’s actually an opportunity to buy solid companies at a low price.
Staying out of the market is going to make you lose out on a ton of amazing opportunities to make money. You just need to do your research and know where to invest rather than just jumping in blindly and buying whatever’s in the news!