Shopping Around to Find Investment Deals
Who doesn’t love a great deal? Whether shopping for new shoes or an automobile, it seems like humans have an inherent desire to get the most bang for their buck. And when it comes down to it, shopping around can be a great way to protect yourself as a consumer, even when finding good stocks to buy.
Aligning Your Needs
We’ve all had experiences where we’ve made impulse buys that we regret. A cheap shirt made from a scratchy synthetic? Never going to wear that again. That five-dollar pair of headphones? Listening to a tinny version of “Hotline Bling” is definitely not worth it.
Shopping around, taking your time to look at criteria like price, materials, and other consumers’ reviews can potentially help keep you from making decisions that you might regret later.
This logic holds true not only at the mall, but also on the trading floor. Not all investments are created equal, and before you invest, it’s important that you understand how to find the ones you want.
Understanding Your Options
Before you start choosing individuals investments, it’s important that you understand the basic types that are available to you. You may already be familiar with how individual stocks work. Stocks are shares of companies that are sometimes IRAs and 401(k)s. The price of the stock represents the price of one share, and it typically fluctuates during the trading day and in the long term depending on demand from buyers, and other factors.
You may be less familiar with mutual funds, index funds and exchange traded funds (ETFs). These funds bundle groups of stock and other investments, so when you purchase a share, you are actually buying a small piece of many different stocks.
Index funds and ETFs typically track the stocks in an index, such as the S&P 500, which represents the 500 largest U.S. stocks. You also purchase these funds from a broker.
Doing Your Due Diligence
Picking investments is a bit like buying a new car: You want to check under the hood to make sure that everything is in good working order before you make a purchase. Here’s a list of some things to consider:
• Earnings growth: Look for companies that exhibit an upward trend in their earnings. Consistent earnings growth can be a good indicator of a healthy stock.
• Cash flow: A lot of free cash flow—the money left over after a company pays for its own operating costs—can be an indicator of a strong company.
• Return on assets (ROA): A company’s ROA is an indicator of how profitable it is relative to the assets it holds. In other words, ROA shows investors how efficient the company is at using its assets to generate earnings.
• Return on equity (ROE): A company’s ROE is an indicator of how well it’s using investor capital and other debt. It measures how well the company uses investments to generate earnings.
• Management: Take a look at how a company is managed. Is the company culture healthy? Are the people who run the company good at their jobs? Are there any scandals that could have a negative impact on stock price?
When buying mutual funds there are other important factors to consider.
• Expense ratio: It costs money for managers to run a mutual fund. That cost is passed on to the investor in the form of an expense ratio, a percentage of the mutual fund assets each investor own.
• Turnover Ratios: Examine turnover ratios, the amount of stock inside the mutual fund that is bought and sold each year. This is important because selling stocks inside the fund triggers capital gains taxes.
• Management team: Look for a strong and experienced management team comprising investment analysts and portfolio managers. Learn whether they invest in the mutual fund as well, as this can be a measure of their own confidence in the fund.
Considering Your Whole Portfolio
Take a holistic approach to building your portfolio. A good strategy could include making sure that your portfolio contains many different types of investments, rather than being overly concentrated in a handful of companies. When you spread your portfolio among multiple investments that perform differently under the same conditions, it’s known as portfolio diversification.
The idea behind diversification is that the more types of investments you hold, the less company or industry specific risk you will be exposed to as the market naturally moves up and down. Imagine you invest in only one stock. If that company fails you lose everything. However, if you invested in 100 stocks, if one of them fails, the effect on your overall portfolio will be much smaller.
What’s more, different stocks don’t react the same way to varying economic and market conditions. For example, while some stocks may fall upon news of rising interest rates, others may actually benefit from the news.
Investing in mutual funds, or index funds and ETFs can be a good way to gain exposure to broad portions of the market while investing in only one fund. You may want to consider using these funds as the basis for your portfolio and adding individuals stocks as you identify them and decide to purchase them.
Timing the Market
Think of investing as a long game. The stock market has inevitable ups and downs. When the market drops, you may find yourself tempted to sell your investments. Conversely, when the market is doing well, you may think it’s a good idea to get in on the game and buy.
This concept is known as timing the market . But as many people say, “time in the market is better than timing the market.” You’ll never be able to predict when the right time to buy a stock is. You can’t control the market. Instead, you can educate yourself on stocks, and invest for the long term.
To further avoid timing the market, you may consider an investment strategy known as dollar-cost averaging , which involves buying a set dollar amount of stock at regular intervals. This strategy helps you purchase more shares of stocks while prices are low and fewer when prices are high.
Working with SoFi Invest
If you’re unsure about your investment strategy is right for you, it may be worthwhile to speak with the SoFi planning team. Our financial advisors can work with you to understand your goals and find investments to help you meet them.
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Diversification can help reduce some investment risk. It cannot guarantee profit, or fully protect in a down market.