The stock market has been the centre of attention during the pandemic. From the maddening rise of ‘meme stocks’ (hello, GameStop!) and all the trouble that went along with it to the stratospheric surge of Big Tech, it’s safe to say that stocks have enjoyed all the attention. I suppose I should be grateful to those Reddit folk for this: putting investing at the forefront of people’s minds. Yeah, they generated the wrong kind of attention. But attention nonetheless! But it’s not just the Reddit folk who got involved. Many of us did too!
During the pandemic, thanks to a lovely combo of more free time (those long commutes suddenly vanished) and more money since everything from restaurants to cinemas were a no-show, many individual (retail) investors turned to the handy-dandy stock market to start use of their saved cash. And, as it turns out, there was never a better time to invest than right after the crash of March 2020! Those who took the plunge were rewarded. Big time.
Yet not enough of us are getting invested. Not in the numbers that it should be. Read here why this is the case and why it’s an even bigger problem than you think. So, if you’ve not (yet) taken advantage of this magical compounding machine, here are four of the many, many ways in which you can start earning returns on the stock market.
#1 Income investing
This sort of approach focuses on generating streams of income from the stock market through what’s known as dividends. A dividend is when a company returns some of its profit back to shareholders. You’ll see it called a ‘dividend yield’ which tells you what % of the share price that company will pay out. The higher the dividend yield, the greater your pay-out!
So, say a share price is £15 and its yield is 5%, this means that every year you’ll receive 75p in dividends for every share you hold. So, if you happen to hold 100 shares then your dividend will be £75 each year. Dividends are paid in intervals so you could expect to receive your dividend payments either twice/three/four times per year but it will vary from company to company.
Pros and cons
Property, commodities and energy sectors are usually the ones that pay the highest yields and they’ve also traditionally been sound hedges against inflation – what we’ve got going on at the minute. The downside to these income stocks (ones that pay nice dividends) is that they don’t tend to be your growth companies. Companies that are growing will want to reinvest their profits rather than hand them out. But many high-yielding companies don’t really have areas to invest their profits into so they just dish ’em out. Perfect for income. Because there’s a time and place for everything.
Another problem is that these dividends are never guaranteed. Yes, it looks really bad on a company if they cut dividends as it pretty much shows they’re not making quite as much money as they used to be but during Covid this was the case for quite a few. Many companies slashed their dividends and we entered the horrid dividend drought. This was really bad news for retirees who rely on these companies for their income since they’re no longer working. But, many have since bounced back and have reinstated their dividends and even raised them.
However, this doesn’t mean that you should neglect income areas altogether. They can provide you with some passive income, diversify your holdings and be enjoyed as part of a larger portfolio. So, whether you’re in your 20s, 30s or 50s, income stocks (and funds) can certainly play a crucial role in your portfolio and will hopefully protect you from inflation! Don’t ever bet on one single outcome. Be prepared for it all. Cause if this year’s taught us one thing it’s that literally anything can happen.
#2 Investing for growth
Then there’s the capital appreciation stuff. Income is great but it won’t grow your invested capital, it’ll just give you some extra cash. But if you want your money to grow (through a strong rise in stock prices over an extended period of time), what better place to look than in growth stocks, right?!
When it comes to investing for growth, this is naturally a riskier approach than going for income. But, if you stick around long enough you can reap some big rewards. But the single most important thing is that you invest across many different countries and sectors (aka diversify!) and funds are a handy-dandy way of doing this. There are many global growth funds out there that source growth from all across the world. This way you’re investing for growth (to increase your capital) but with lower levels of risk since you’ll hold many, many different stocks. And across loads of countries.
The thing is, growth stocks (like tech) are so sensitive to any changes in interest rates. Higher interest rates not only lowers their valuation (making them far less attractive) but it also means they’re paying higher rates on their debt. All of this stuff makes it harder and harder for them to actually turn a profit. See, we’ve had record-low interest rates ever since ’08 and while the Bank of England has raised rates (the Fed is yet to do so!) it’s unclear whether we’ll ever return to a period of high interest rates.
We live in a totally different world now thanks to covid and banks’ balance sheets are swelling. The debts they have are massive (the Fed alone printed $5 trillion during covid!) and having higher interest rates would cost them a fortune to repay. Either way, be sure that your portfolios are prepared for anything that comes their way! High interest rates or other.
#3 Active investing
This strategy is all about stock-picking. What fund managers try (and hope) to do is to pick the winning stocks. Through intense research, meeting with business owners, getting into the nitty-gritty of it all they hope to find what no one else can. Now this takes time, effort, skill, oh – and a little bit of luck!
And this is precisely what you’re paying fund managers for. To beat the market. But, no, they do not do this for free! You’ve gotta pay a management fee (usually between 0.5-2% although some charge above/below that) which can eat into your returns.
Here’s the thing, around 1-2% of an index’s stocks will be the ones that end up bringing about the most returns. Just look at the Nasdaq where a handful of stocks (ahem, Big Tech) dominate its returns. And I bet it’s tricky to find this 1 or 2%. But managers will cast their nets as wide as possible. And all they need is a few to really take off. Active investing is great for areas like emerging markets and small caps that don’t tend to get the same research coverage as others do. Which means fund managers can look for gold in areas most people have deserted.
#4 Passive investing
You can invest via a passive route using index funds (tracking an index like the S&P500 or the FTSE100) or through ETFs that can track a particular industry/sector (as well as an index btw) like a cybersecurity EFT for instance. The benefit: you don’t need to waste your time (or pay anyone else) to sift through countless stocks and invest in the ones you think will outperform (aka an active strategy). You just buy the whole lot. And sit back and relax. Buffett-style.
The fees for ETFs are way cheaper than their active peers and if you’re happy opting for broad coverage, much like an all-you-can-eat-buffet, then passive is your friend. Read here how passive became the beast it is today. And how it all started with one man. In the end, fees really can eat into your returns so it’s definitely something to consider when choosing not only what you’ll invest in but how you’ll invest into it.
There has always been the active guys and the passive guys. Two very separate teams. But who says you can’t be on both teams? Diversification is as much having different stuff in your portfolio as it is different styles. The investment approach that will work best for you will largely be determined by your age (the older you get, the less risk you want to take) and your overall attitude toward risk. But whatever approach you choose, you must be comfortable with it and be sure that you’re not investing more than you can afford to lose.
But don’t be afraid of taking on some risk. I know plenty of people who stayed invested in ultra- safe areas in their pension pot (mainly bonds and a bit in stocks when it should’ve been the other way round) and they are now wishing that they would’ve done things a little differently.
Investing can surely help shrink that wealth gap (especially between men and women) and it’ll also give you some peace of mind knowing that your capital is slowly getting bigger for your future selves to enjoy. After all, cash ain’t gonna cut it anymore. It’ll just lose you money. Year on year. Thanks to inflation.
Remember this: there is a risk to everything. Stock markets are known to be risky areas but not investing carries its risks, too. Like running out of money before you retire and not being able to live the life you want. No one wants to be counting their pennies age 80. Or wait till you’re 70 take that vacation you’ve always dreamt of taking. Read here why you must start thinking about retirement now, not in 20 years’ time.
Back to all that Reddit (meme stock) stuff. To tell you the truth, as a long-term investor all that stuff is pure noise. Noise that you should block out. If you are playing the long-game, then none of this should concern you.
So, pop on those noise-cancelling earbuds. It’s time to play your own music. You’ve got a future to build!
Disclaimer: This blog is not investment or financial advice. It is my opinion only. This blog is not a personal recommendation to buy/sell any security, or to adopt any such investment strategy. Always do your own research before you commit to any investment.