Without a doubt, we all have the concern of how to invest our money and maximize our returns. Investments in general, and perhaps even more risky ones like stock markets, can cause fear in people and they shouldn’t be. You must lose the fear of managing personal finances to improve our quality of life. To achieve what is known as financial freedom, we cannot leave our savings standing in the bank’s checking account.
There are many ways to invest your money and make it generate more, but in this text I would like to focus on investments in the stock market and, for simplicity, only in company stocks without going into detail in other more complicated products. Step by step .
Many geographies and possibilities
First we have to understand that investing in the stock market is not limited to bankers like those shown in movies like Wolf of Wall Street and it is not limited to the Mexican Stock Exchange located on Reforma Street. Today there are many digital platforms that are even commission-free and where we can all invest from a few thousand pesos in different geographies. For example, in New York there are several Stock Exchanges such as S & P500 or Nasdaq, the first has larger or more “consolidated” listed companies and the second has companies listed mainly with strong technological components and still with a long way to go. You can also invest in emerging markets such as China in companies listed in Hong Kong or within the different exchanges of the countries of the European Community such as France, Spain or Italy.
Find out well about the companies in which you invest
Information is essential. You cannot invest in a company without first studying its market, the industry and how it has evolved or how it is expected to evolve in the coming years, the company’s management team and news in general about the company. It is important that when you decide to invest in a company, it is long-term and that it is an informed decision based on how you think that company is going to do the work in the medium or long-term future. There are many pages and sources that gather useful information to do this study before opting to invest in that company.
One way to reduce the risk in your investments is to have a well diversified portfolio. In this way, what you are going to achieve is that if for some reason a company is doing very badly, the impact on your portfolio is less and the more shares, of different companies from different sectors, industries, sizes and others, the less they have. risk will have your portfolio. For example, imagine that you invest in a company that for some reason enters a regulatory problem, in that case it is very likely that the value of the share will decrease significantly and if it is your only investment, then the impact is 100% related to the total of your portfolio. Another example is that you are invested in several companies, but in a single industry and that industry by X or Y contracts or suffers some problem because the same will apply to the various companies in which you are invested in that industry and if you are only invested in stocks of that industry because again the effect it will have on your portfolio will be important. I recommend having two or three different portfolios with different investment approaches and in each of them between 12 and 20 companies.
Long-term vision and emotional intelligence
The best way to think about your investments is planning them on a long-term horizon, at least 5 years. The reason for this recommendation is that to achieve significant investment returns without much risk, it is easier to invest in companies with good long-term potential. The markets can have corrections or even financial crises that last several months or years and you never know for sure when that will happen; However, what you can know is that it is a temporary situation and sooner or later the market will return to an uptrend. If you look at the chart of an index like the ones we mentioned before, S & P500 or Nasdaq, you will see that they have suffered big falls – like the one in 2000 with the dotcom – but over time, looking with broader time horizons they have returned to its previous levels and even grown considerably. I do not recommend playing the financial operator, better choose industries or companies that you consider have a lot of potential and bet on them for 5, 10 or 30 years.
For example, look at how Nasdaq when the COVID-19 lockdowns began lost almost 40% of its value in a matter of a few months. If you had invested your money in a short time horizon or you had not controlled your emotions, you could have lost a lot of money.
Image: Yahoo Finance
But now let’s look at the big picture and see where the index value is today. From its worst post-crisis Covid moment to February 2021, the value of the index increased by more than 100%. You also have to take advantage of those moments, and if your liquidity allows it, and it is always recommended that you have at least 20% of your liquid savings just for that, even increase your position in companies that you consider stronger. That is, not only would you not have lost 40% of the value of your portfolio by not selling, but that same portfolio would have increased by 30% compared to the highest value before that market crash and also if you had bought more shares, As Warren Buffett says, when there is blood in the streets, those positions would have increased by more than 100% in a matter of a few months.
Image: Yahoo Finance
Look for trends looking to the future
Another important recommendation is not to see which companies are successful today, for the same reason that we want to invest in the medium and long term, but to see which companies will be successful tomorrow. What will be the next Amazon? Some industries that are very interesting to my taste are robotics, biotechnology and electric vehicles. Within 5 years, the levels of evolution in medical issues that are achieved through biotechnology will be gigantic. Think about which companies were the first to make the Covid vaccine with methods that had not been used before and also in record time? Who is going to be the next company to cure cancer thanks to these technological advances? Or in the case of the automotive industry with electric vehicles, clearly there are some companies that we all know that are going to be some of the winners, but what other companies are working in that industry that in the future will be huge? Who is working on new technologies to supply batteries to those who are the future giants of the automotive industry?
I hope these recommendations can be useful to you and add value to your financial life. The purpose of this text is to encourage people to do more research on how they can get more value for their money. We must begin to generate a better culture of investments and savings, in the end that can considerably improve the quality of life of people and we all benefit.