The Challenges of Finding the Next Amazon
Finding the next Amazon stock isn’t just hard, it’s getting harder. The stock market is the most accessible wealth-building tool we have – you can take your extra $10 or $100 and buy a piece of a company like Amazon. But there are two big problems with this approach:
- Picking the Wrong Company: If you pick the wrong company, you can lose everything. We’ve all seen once-dominant companies like Sears, Bed Bath & Beyond, and Spirit Airlines crumble.
- Shorter Company Lifespans: In the mid-1960s, a company that made it into the S&P 500 would stay there for about 33 years on average. Today, the average tenure for an S&P 500 company is just 15 years. Technology is making it easier for companies to grow – and fail – faster.
This makes it increasingly difficult to identify the next long-term winner. But it doesn’t have to make it harder to make money in the stock market. In fact, it can actually make it easier – if you know the right strategy.
The Power of Dollar-Cost Averaging
The key to winning in the stock market game is to play a different game altogether – the game of dollar-cost averaging (DCA). Here’s how it works:
- You consistently, passively, and automatically invest a set amount of money into the market at regular intervals (e.g. weekly, bi-weekly, monthly).
- You do this regardless of whether the market is up, down, or sideways.
- Over the long-term, this allows you to take advantage of the market’s general upward trend.
Here’s a visual depiction of how this works:
The markets go up and down, but by consistently buying at regular intervals, you end up averaging your cost basis. This helps you weather the inevitable market crashes and downturns.
The key is to avoid the common mistake that so many investors make – buying high and selling low. When the market is soaring, people feel like it will keep going up forever, so they buy in. Then when the inevitable downturn comes, they panic and sell, locking in their losses.
With a DCA strategy, you don’t try to time the market. You just keep buying, no matter what. In fact, the only time you might consider buying more aggressively is when the market is down – because that’s when the best buying opportunities arise.
Funds to Consider for DCA Investing
So how do you actually implement a DCA strategy? Here are some funds you may want to consider:
Total Stock Market Fund (VT)
VT is an exchange-traded fund (ETF) that gives you exposure to the total US stock market. It holds thousands of companies, providing broad diversification. When the overall market goes up, VT generally goes up. When the market goes down, VT generally goes down.
S&P 500 Fund (SPY)
SPY is an ETF that tracks the S&P 500 index – a collection of the 500 largest publicly traded companies in the US. This provides exposure to many of the biggest and most established companies.
Nasdaq-100 Fund (QQQ)
QQQ is an ETF that tracks the Nasdaq-100 index, which is made up of the 100 largest non-financial companies listed on the Nasdaq exchange. This gives you exposure to many of the leading tech companies.
Dividend-Focused Fund (VYM)
VYM is an ETF that invests in high-dividend paying companies. This can provide you with a steady stream of dividend income to supplement your portfolio growth.
Dividend Aristocrats Fund (NOBL)
NOBL is an ETF that holds the “dividend aristocrats” – S&P 500 companies that have increased their dividends for at least 25 consecutive years. This provides exposure to established, dividend-paying companies.
The beauty of these funds is that they allow you to easily diversify your portfolio and get broad market exposure, without having to research and pick individual stocks. You can simply allocate a portion of your regular investments into each of these funds and let them do the work for you.
Implementing a Consistent, Passive, and Automatic (CPA) Strategy
Now that you have some fund options to consider, the next step is to actually implement your DCA strategy. The key is to make it Consistent, Passive, and Automatic (CPA):
Consistent: Set a regular cadence for your investments, whether that’s weekly, bi-weekly, or monthly. The key is to stick to it.
Passive: Don’t try to time the market or make active trading decisions. Just let your regular investments do the work.
Automatic: Set up automatic transfers from your checking account to your investment accounts so the process happens without you having to think about it.
One platform that can help facilitate this CPA approach is M1 Finance. With M1, you can create a “pie” of the funds you want to invest in, set your target allocation for each one, and then have your regular contributions automatically invested according to that allocation.
For example, you could set up a pie with 25% in VT, 25% in SPY, 25% in QQQ, and 25% in VYM. Then every time you make a contribution, it will be divided up and invested accordingly. M1 makes it easy to set this up and run it on autopilot.
Always Be Buying (ABB)
The final key to success with a DCA strategy is to always be buying (ABB). This means continuing to invest consistently, even when the market is down.
It’s human nature to want to stop investing when the market is crashing. But that’s exactly the wrong time to do it. Those downturns are actually the best buying opportunities, because you’re able to purchase assets at a discount.
The mistake so many people make is buying when the market is high and then selling when it’s low. With a DCA approach, you flip that script – you keep buying no matter what, and you hold through the downturns.
“The first few years of you’re doing this you’re going to see almost nothing you’re going to see almost no returns because Market’s going to go up and down you’re going to be very emotional but remember don’t touch it ABB CPA keep it consistent keep passive keep it automatic and always be buying.”
As long as you stick to your CPA strategy and always keep buying, you’ll be able to weather the market’s ups and downs. And over the long-term, you’ll be able to take advantage of the market’s general upward trend.
The Power of Compounding
The key to making a DCA strategy work is patience and consistency. It may not feel like much is happening in the first few years, but over time, the power of compounding will start to kick in.
“The first few years of you’re doing this you’re going to see almost nothing you’re going to see almost no returns because Market’s going to go up and down you’re going to be very emotional but remember don’t touch it ABB CPA keep it consistent keep passive keep it automatic and always be buying.”
After 3-5 years, you’ll start to see more meaningful returns. After 6-8 years, the gains will really start to accelerate. And by years 9-10, you may be surprised at how much wealth you’ve built.
The key is to stick with it through the ups and downs. Don’t get discouraged by short-term volatility. Instead, embrace it as an opportunity to buy more at a discount.
Putting It All Together
Let’s say you make $5,000 per month after taxes, leaving you with $3,833 per month to work with. Here’s how you could implement a DCA strategy:
- Set up automatic transfers: Have $1,000 per month automatically transferred from your checking account into your investment accounts.
- Allocate across funds: Divide that $1,000 evenly across your chosen funds – e.g. 25% to VT, 25% to SPY, 25% to QQQ, and 25% to VYM.
- Reinvest dividends: Any dividends you receive should be automatically reinvested back into your funds.
- Increase contributions over time: As your income grows, try to increase your monthly investment amount. The more you can invest, the faster your wealth will compound.
By taking this consistent, passive, and automatic approach, you can build wealth in the stock market without having to worry about picking the perfect individual stocks. You’ll be able to weather the inevitable ups and downs, and take advantage of the market’s long-term upward trend.
Conclusion
The key to never losing money in the stock market is to stop trying to find the next Amazon, and instead focus on a simple DCA strategy. By consistently, passively, and automatically investing in a diversified portfolio of funds, you can build wealth over the long-term – regardless of what the market is doing in the short-term.
The most important things are to:
- Stick to your CPA strategy no matter what
- Always keep buying, even (and especially) when the market is down
- Give it time for the power of compounding to work in your favor
If you can do that, you’ll be well on your way to achieving your financial goals without the stress and volatility of trying to pick individual winners. It may not be as exciting, but it’s a proven path to long-term success in the stock market.