Investing can be a tricky business, especially for members of the working class who might not have access to the same expert advice and aid as wealthier investors. For effective investing, individuals need to have a solid understanding of the state of the market, as well as a clear idea of the value of the investment, based on expected future cash flows.
Unfortunately, becoming informed about investing takes significant time and effort. Those are two commodities that many individual investors — especially those in the working class — might not have to spare. With that fact in mind, here are nine tips that working-class individuals can use to help improve their investment returns.
1. Look for Stocks With Stable Dividends
While it’s natural to be tempted by daring investments with high potential payoffs, these stocks can wind up costing you a great deal in the long run. By selecting stocks with reasonable dividends, middle-income investors can ensure they get returns in their pockets every year.
Even if the company does offer high dividends when times are good, it might pay far less in years that aren’t as successful. To protect your bank account and retirement fund, be sure to choose stocks with stable dividends year in and year out.
2. Avoid Stock Gambles
Avoiding highly volatile stocks might seem like an obvious piece of advice. However, the truth is that many stock buyers invest not only for the returns, but also for the thrill of taking part in the market. While buying into risky stocks might be a fine policy among millionaires, financial economists have shown that these types of investments are bad ideas for members of the working class.
Instead of gambling on high-risk stocks, individuals investors should strive to find healthy companies that are growing slowly but steadily with time. After all, you don’t want your stocks collapsing during tough economic times when you might be facing a job loss and other serious problems.
3. Try to Hold at Least 10 Different Stocks
Diversification is a crucial part of earning a solid return on your stock investment. To achieve adequate diversification, strive to hold a portfolio of stocks that broadly represents the overall U.S. economy.
While there’s no perfect number of stocks to hold, experts suggest choosing at least 10 different stocks in a number of industries. Holding only biotechnology or energy stocks, for instance, can lead to serious problems if that particular sector falls out of favor. Because working-class investors might not have access to the same resources and advice as wealthier stock buyers, they are less likely to adjust their portfolios in time to avoid a loss.
4. Hold Stocks for at Least 366 Days
A common piece of stock market advice that is especially true for working-class investors is to avoid short-term stock trading. In practice, investors should aim to hold stocks for at least 366 days — that is, one day more than a full year. When you keep stocks for less than 366 days, any profits you earn are taxed at a higher rate. By waiting a year and a day to sell, you can minimize taxes on current profits while ensuring future dividends are taxed at a lower rate.
Lower tax rates are an especially important benefit for working-class investors who might not have as many tax credits and deductions as those in the higher income brackets.
5. Rebalance Your Portfolio as You Age
While many investors start out with more sensible investments portfolios, they often make the mistake of failing to change their portfolios as they age. Because individuals’ needs and risk preferences change with time, it’s important to adjust your stock holdings accordingly.
In general, older and retired people tend to appreciate stable streams of stock income, while younger investors can afford to take more risks, as they aren’t relying on this income to live. However, people in the working and middle classes might want to adjust their portfolios each time they get a new job or hit a life milestone. By rebalancing your portfolio periodically, you can ensure that your investments truly are meeting your needs at any given time.
6. Throw Some Bonds Into the Mix
Many investors gravitate toward the more exciting stocks, but working-class individuals in particular should consider adding some bonds to their investment mix. Although they tend to generate less media attention, bonds provide a level of safety and security that stocks simply cannot. When determining how much of your portfolio to keep in bonds, you might want to use the following rule of thumb:
Subtract your age from 100. This value represents the percentage of your portfolio that should be in stocks. Hence, someone who is 30 years old should have 30 percent of her portfolio in bonds and 70 percent in stocks.
Adhering to these percentages can help protect your investment income as the economy and other life factors change.
7. Consider Real Estate Investment Trusts (REITs)
While wealthier individuals often invest in rental properties and vacation homes, these purchases tend to stretch the budgets of lower-income investors. Because real estate is still an important asset class, working-class investors might want to consider REITs as an alternative to buying property.
Although they trade like stocks, REITs are an entirely different asset class. Moreover, they provide working-class investors with a more affordable way to buy major real estate projects. If you already own your own home, you might want to consider this potentially lucrative investment opportunity.
8. Know What Kind of Returns to Expect
It’s no secret that keeping up with the latest news and trends from Wall Street can be a full-time job. For those of us who don’t have trading experts around to answer our questions, it can be tough to know what type of returns to expect on various investments. Not only do many investors hold overly optimistic views of potential returns, but in some cases these beliefs lead people to make poor money management choices, as they expect to have more investment income available down the line.
Realistically, if stocks returns continue to follow the trends of the last 90 years, investors can expect their portfolios to earn about 7 percent more than inflation on average, assuming an inflation rate of around 3 percent. By keeping these figures in mind, you can ensure that all your future financial decisions are based on sound logic.
9. Get Someone Else to Do the Work for You
Perhaps the best advice for time-constrained working-class individuals looking to invest is simply this — get someone else to do the work for you. The truth is that selecting sound stocks is difficult, and many individual investors wind up doing worse than the market as a whole. For most people, the best advice for investing is to avoid picking stocks at all.
Instead, try investing in a low-cost mutual fund or ETF that provides you with smart stock options. You can choose from the various providers available to individuals or ask your employer if he or she has an arrangement in place wherein a company like Fidelity provides staff with mutual fund choices.
Letting someone else handle your investments might not seem as fun or exciting as doing it yourself, but in the long-run your checking account will thank you.
You don’t have to be a millionaire, or a stock expert, to succeed in the investment world. By following the above tips, middle-income investors can experience the thrill of the market while reaping great financial rewards.