While investing can seem like a complicated and daunting task, it really doesn’t have to be. By figuring out your own skillset, risk appetite, and time horizon, it’s possible to become successful in the stock market. Even the most novice investors can do well. Of course, no one should put money in the stock market unless they have taken care of high-interest debt and have adequate savings in an emergency fund.
Once those important tasks are taken care of, the focus can turn to investing. Along that same vein, if I had to start from scratch today, here is how I would invest $20,000.
Active or passive
The first question I’d ask myself is whether I want to pick individual stocks myself and actively manage my portfolio or if I want to instead focus on choosing index funds or exchange-traded funds to allocate my capital. I think this is an extremely important first step that will help guide the investment process.
Because I personally have confidence in my ability to identify good businesses and analyze their qualitative factors and valuations, I would choose to go the way of picking individual stocks. Plus, I have the time to commit to doing this. For those who are busier and don’t have the time to look through SEC filings or listen to earnings calls, going the passive route is totally fine.
Focus on dominant companies
Now that I have decided I want to choose individual companies to own, I need to figure out my investment philosophy. I look for companies that are leaders in their respective industries, with strong growth prospects that are riding broad secular trends. Finding them at an attractive valuation is also important.
I’m comfortable with running a super-concentrated portfolio, so with $20,000 to invest, I’d be totally fine with identifying three opportunities to allocate that sum in equal parts. This will allow me to focus on holdings that I know a lot about and have the capacity to closely monitor over time, as opposed to owning 25 or 50 different securities that would be difficult to keep tabs on.
First, I’d put one-third of the $20,000 in shares of Alphabet (GOOGL) (GOOG). Although the business has been dealing with a major slowdown in the digital ad market, the long-term outlook is still robust for the company’s different segments. With roughly $100 billion of net cash, Alphabet has the wherewithal to navigate headwinds and still invest in growth opportunities.
As of this writing, the stock trades at a price-to-earnings ratio of 20. This is well below its trailing-five-year average valuation, making Alphabet a solid investment candidate right now.
The second company I’d own is Amazon (NASDAQ: AMZN). Like Alphabet, it is facing a slowdown, this time following a surge in e-commerce spending during the coronavirus pandemic. But I view this as temporary. Also, Amazon’s lead in cloud computing will be a huge driver of revenue and profit growth in the years ahead.
Since hitting an all-time high in July 2021, Amazon shares have fallen 51%. And they now trade at a price-to-sales ratio of 1.8, half the trailing-five-year average valuation. I think now would be a good time to buy the stock.
While Alphabet and Amazon probably won’t come as a surprise to readers, as they are two massive, well-known, successful enterprises, this last choice might. I’d use the final $6,667 to buy Bitcoin (CRYPTO: BTC). Bitcoin’s prioritization of decentralization and security truly makes it different from the tens of thousands of digital tokens out there. And as the oldest and most valuable cryptocurrency, the Bitcoin network’s durability through the ups and downs of the market increases the chances that it isn’t going anywhere.
With the potential to become a more popular store of value and maybe a global medium of exchange, Bitcoin’s current price of $22,300, which is off nearly 70% from its November 2021 peak, could one day be orders of magnitude higher.
Since I’ve done research on Alphabet, Amazon, and Bitcoin, I feel extremely confident about owning them, especially if I had $20,000 to invest from scratch today. The plan going forward, however, would be to add savings every month to this portfolio in other businesses that I find compelling. This way, the portfolio could become somewhat diversified over time.
Adopt a long-term mindset
It’s worth mentioning that investing is a long-term game, so it’s best to adopt a mindset that spans decades instead of days, or weeks, or quarters. This will hopefully give investors the right temperament to focus on the fundamentals, as opposed to stock price movements, and be able to handle the inevitable volatility.
— Neil Patel
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Source: The Motley Fool