For generations, the U.S. stock market has been the best and most reliable money-making machine on the planet. But, how to get started investing and take advantage of the stock market’s power is always the issue. The average return on the basket of stocks in the S&P 500 has been 10% per year per year ever since the index began as the Composite Index of 90 stocks back in 1926. Today the S&P 500 is a group of 500 stocks that accurately mirror the U.S. stock market as well as the U.S. economy. Are the best stocks to invest in the individual stocks in this index? In this article, we would like to offer some investment tips for beginners and even look at some of the best long term stocks to buy right now. But, our best advice is really not about exactly which stocks to buy today but rather how to go about the process of investing so that you can always understand which are the best stocks to invest in today and tomorrow and for years to come.
Knowing Which Are the Best Stocks to Invest In
Our opinion at Profitable Investing Tips is that there are always best stocks to invest in. However, these stocks change as time goes by. Knowing what makes the current favorites the best stocks to invest in is how to succeed always in the business of investing. In this regard, there is an old saying in regard to how to help someone in need.
Give a man a fish, and you feed him for a day. Teach a man to fish, and you feed him for a lifetime.
Although the idea is old, the current quote may only be about 50 years old.
We at Profitable Investing Tips would like to follow this example and rather than routinely give you short-lived stock tips, we prefer to give you, our readers, the tools to know how to invest in stocks both now and for years to come.
Investing Goals, Timelines, and Risk
As we note in our companion article, investing in stocks, we invest to make money, attain specific goals, and be financially secure. It sounds simple but most truths are. The U.S. Securities and Exchange Commission advises beginning investors to define your goals as a first step to investing in stocks.
A good idea when investing is to be very careful with a portion of your money so that a bad investing decision, a market crash, and recession, or some other unforeseen problem does not totally wipe you out. In this regard, we wrote about how to invest without losing any money. Read this article for some useful thoughts about how to treat the most conservative part of your investment portfolio.
Some of the most successful investors are also some of the richest people in the world. Warren Buffett, the so-called Oracle of Omaha, comes to mind. People who invest over the very long term benefit from that 10% per year per year market appreciation that the stock market offers. They make a lot of money in a bull market and may lose some in a bear market, but over the years their investments continue to appreciate. And, because they do not attempt to time the market, they are not caught with short term losses on investments that they first made. Although there is the promise of great profits when you pick just the right stock at just the right time, jumping in and out of investments carries its own risk and a greater investing overhead in terms of fees, commissions, and taxes.
The best stocks to invest in over the years are from companies that make money year in and year out and who business plans are likely to continue to work for decades to come.
How to Get Started Investing
When we think about how to start investing at 18, just out of school, what comes to mind are penny stocks simply because they are cheap. But, the best stocks to invest in for beginners are not necessarily the cheapest stocks. And, you do not necessarily need to wait until you have saved up to buy even a single share to get started investing.
Fractional Share Investing
With fractional share investing, beginning investors can invest in the stocks of their choice. The Balance lists seven excellent choices for fractional share investing.
If you want to invest in the stock market, you might be scared off by the perception that you need thousands of dollars right from the start. But that isn’t true – in fact, you can get involved without even buying a whole share of stock at once. With fractional share investing, you can buy as little as $5 or $10 of a stock in a single trade.
Rather believing that you will never be able to buy stocks that sell for more than $1,000 a share like Amazon.com or Alphabet (or Berkshire Hathaway at more than $300,000 a share) beginning investors can go to a brokerage that buys these stocks and then resells fractions of shares. Here is their suggested list of brokerages.
- M1 Finance
- Folio Investing
Additionally, when you have purchased stock from a company like 3M (about $210 a share) you can sign up for their dividend reinvestment plan. This allows you to buy fractional shares with your quarterly dividends, without paying fees or commissions. This is another good way to purchase good companies without paying a lot.
Investing Using Dollar Cost Averaging
When a beginning investor purchases inexpensive stocks, or preferably fractional shares of excellent stocks, the best approach is to simply pick an amount that you can afford to invest and put that into stocks every payday, every month, or every quarter. U.S. News wrote about dollar cost averaging.
DOLLAR-COST AVERAGING is a disciplined way for investors to build wealth in their portfolio over time while helping them avoid emotional-driven decisions.
Many people mistakenly believe that they need thousands of dollars to start investing for their retirement, causing them to be risk-averse in opening a traditional investment retirement account or Roth IRA. But nearly anyone can get started with the strategy. For instance, this style of investing can help novice investors who have recently opened a retirement portfolio, and don’t have a large sum of money for an initial investment.
Always buying the same dollar amount of stocks works because by purchasing more stocks when prices are low you will get good deals and by purchasing fewer stocks when prices are high you will not overspend in an overpriced market.
Best Stocks to Invest in Now
You can take stock tips from your barber or a taxi driver. You can take stock tips from any of the numerous pundits on the various investing publications. But, you need to do a bit of homework to verify that the suggested stock tip is really a good idea. There are two ways to approach this decision. First, is this a stock that has, in your mind, a temporary low price? If so, you are in the business of marketing timing. You buy the stock, wait for the price to go up and then you sell it before a volatile market takes the price down again. This is short term investing and to do it successfully you are more interested in how the market views this stock than in its long term value. As noted in our article about proven stock market strategies, this is simply a matter of buying low and selling high.
But, what if you want the best stocks to invest to buy right now but hold onto forever? The first part is the same. You are looking for stocks that are cheap and likely to go up in price. The second part is that you are not looking for a stock that will have a higher price in a month or two but a stock that will keep appreciating value for ten, twenty, thirty years, or more!
The Real Value of a Stock Investment
Back in the “Roaring Twenties” it was common to “play the stock market.” Stocks were going up and almost no matter which one you bought it was more valuable the next year or even the next month. Then the 1929 stock market crash ushered in the Great Depression and not many folks wanted to “play the stock market” any more. Nevertheless, the market recovered and money investing before the 1929 crash is what is used in the estimate that the market returns 10% per year per year on the average!
It was the in years after that the 1929 crash that a new view of investing appeared. It was an approach that did not dwell first of all on the price of the stock but on the ability of the company to make money and the likelihood that the company would continue to do so for the indefinite future. Intrinsic stock value is based on anticipated earnings. In order to determine if a stock is a good investment today and for years to come an investor needs to understand what the company does to make money and how that business plan will continue to work for years to come. Then the investor determines what that ability to generate income will do to the stock price over years and he or she compares that projected stock price to the current market price.
Best Stocks to Invest In Based on Intrinsic Value
Kiplinger wrote about what they consider to be the 10 best value stocks to buy now. Here is their list.
- Berkshire Hathaway
- Loews (NYC holding company, $2.1 billion stock portfolio plus insurance companies, hotels, a packaging business, and oil businesses)
- J.M. Smucker
- CVS Health
- Best Buy
- Southwest Airlines
- Dollar Tree
If you are interested in any of these stocks, start by reading the Kiplinger’s article and then do your homework. The point of using intrinsic stock value is a guide is that it helps you determine if a stock is a good long term bet instead of something to buy, hold for a few months and then sell. But, even though a stock with strong intrinsic value is always a good bet long term, these stocks are better when you pick them up at bargain prices. Such was the case when Berkshire Hathaway bought lots of Coca Cola stock at depressed prices in the late 1980s. Today the dividend paid on these shares of stock is close to half the original share price!
Why Is the Stock Price Depressed?
As we noted before, there is a temptation to buy penny stocks because they are affordable. But, why is the stock cheap? Is the price depressed because the company has long term unfixable problems? Are its competitors taking away all of its business? Are its debts so overwhelming that recovery is merely a fantasy? When this is the case, the stock is cheap but not cheap enough! On the other hand, there are stocks that have fallen off the Wall Street “radar.” They have made changes and will soon be reporting fantastic earnings. Once the earnings are reported the stock price will skyrocket. These are absolutely the best stocks to invest in when you find them. But, be careful. Some such stocks are “story” stocks and the story may never materialize. These stocks are being hyped. When the stock price goes up the folks hyping the stock will sell, leaving your investment to plummet. This is called a “pump and dump. Investopedia offers advice about how to avoid getting pulled into a pump and dump scheme.
Investors should be wary about notices that a stock is about to take off – especially when they are unsolicited – no matter how tempting it may be. Consider the source and check for red flags. Many notices come from paid promotors or insiders, who should not be trusted. If an email or newsletter only talks about the hype and doesn’t mention any of the risk, it’s probably a scam. Always do your own research in a stock before making an investment.
This advice takes us back to the beginning. The best stocks to invest in are those that have money-making potential in excess of what the market as a whole currently appreciates. When someone is talking up a storm about a stock, check it out. But, remember something that the famous investor Warren Buffet said. It was that when he and his team look at stocks and their intrinsic stock value, they throw out 95% of the stocks they look at as being “too difficult to call.” And, if you don’t know and cannot be sure, do not buy the stock. There is absolutely nothing wrong with leaving your money in your bank account until you make a decision that you can live with!
Investing in Blue Chip Tech Stocks
The stock market was driven to higher and higher values since the financial crisis largely due to earnings of a handful of tech stocks, Alphabet (Google), Microsoft, Apple, Amazon.com, Facebook, and Netflix. Are stocks from large companies like these the best stocks to invest in? Facebook is having issues of its own and may be left out of this discussion. But, many smart investors do not worry about finding a “needle in the haystack” stock that is underpriced and due to skyrocket. Rather, they are perfectly happy with a stock that pays a nice dividend (which they reinvest) and appreciates nicely in stock price year after year. For this approach to work, you still need to understand how the company makes its money and how they will continue to do so into the indefinite future. But, many believe that the best stocks to invest in are not only ones that provide a nice return on your capital but also allow you to sleep soundly at night.