“Essential Tips for Smart Stock Investing”

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When to Buy Stocks

The stock market is always changing, so there’s no definitive right or wrong time to trade stocks. As an investor, you need to assess what makes sense for you based on your financial goals, age, risk tolerance, and investment portfolio. Here are some scenarios when it may be a good time to consider buying stocks.

You Have a Long Investment Timeline

The longer you’re invested, the more time you have to benefit from compound interest. This allows you to earn interest on your initial investment plus the gains you’ve already earned. You can use this to your advantage when investing for a long-term financial goal like retirement.

For example, if you start putting 10% of your income into a 401(k) at age 35 with a salary of $100,000, after 30 years, you would have contributed $410,000. Assuming a 6% rate of return, your balance would be over $1 million. That’s the power of compound interest.

There’s a Stock That’s Undervalued

Buying individual stocks can be risky because there’s no guarantee they’ll perform as expected. The idea is to buy stocks when they’re undervalued and sell them when they’re worth more. Two popular ways to measure the value of a stock are:

• Relative valuation: This looks at how a stock is performing compared to its competitors. You find the price-to-earnings (PE) ratio by dividing the current stock price by its per-share earnings. A company with a lower PE ratio than its competitors may be undervalued.
• Absolute valuation: This method looks at a company’s overall financial health to determine the true stock value, including its balance sheet, cash flow, assets, and other relevant information.

You Believe in a Company’s Values

Many investors devote some or all of their portfolios to ESG investing, which involves intentionally investing in companies that share your values. These organizations may prioritize environmental sustainability, social justice causes, or diversity, equity, and inclusion efforts. If these companies succeed, you’ll net investment returns in the process.

You Want to Position Yourself for Growth

While low-risk investments like bonds, certificates of deposit (CDs), and money market accounts typically provide stable returns, your portfolio may struggle to keep up with inflation over time. Stocks can help fuel growth and secure better returns over the long haul. Investment risk is higher, but staying diversified can help offset losses along the way. That means buying a mix of securities across different asset classes and risk levels.

When to Sell Stocks

You may think about selling your stocks under certain conditions.

You’ve Reached Your Goal

Investing can help you reach long-term goals like retiring or paying for your kids’ college education. You might choose to offload some stocks once you cross the finish line. In retirement, for example, one rule of thumb is to go lighter on stocks and heavier on bonds.

You’re Rebalancing Your Portfolio

Your asset allocation refers to how your portfolio is organized. A 60/40 portfolio, for example, holds 60% stocks and 40% bonds. The best asset allocation for you will depend on your age, goals, and risk tolerance. Even if your holdings feel just right, you’ll likely need to rebalance your portfolio at some point. Stock values change over time, and that could throw things out of alignment. Rebalancing often involves selling high-performing assets and redirecting the returns, which can help restore your desired asset allocation. It’s a good idea to do this annually.

There Are Changes Within a Company

There may be times when owning stock in certain companies no longer feels like the right fit. If revenue is steadily declining or the company is making decisions that go against your values, you may feel inclined to part ways. You might also consider selling if the company is being bought out by a larger organization. Stock prices tend to increase soon after that information goes public.

You Need to Liquidate

If you encounter a financial emergency and don’t have funds on hand to cover it, selling stocks could free up cash. However, there’s no guarantee you’ll net a profit or recoup your initial investment. You can easily pull money from a brokerage account, but withdrawing funds from a 401(k) or traditional individual retirement account (IRA) will likely trigger a 10% early withdrawal penalty—and a tax bill.

When to Hold Stocks

It’s not always about buying and selling stocks. Here’s when you might consider holding stocks in your portfolio:

You’re Investing for a Long-Term Goal

Market volatility causes stock values to fluctuate. A company’s share price can go up and down in response to economic changes, political uncertainty, industry shake-ups, and more. Price swings can happen gradually or relatively quickly, but the stock market has had an average annual return of 10% since the 1920s. If you have a long timeline ahead, it may be best to ride out market dips and stick to your investment plan. You’ll likely have time to bounce back from short-term volatility.

You Want to Avoid Higher Tax Rates

You may have to pay capital gains tax when you sell stocks. The amount will be based on your income, tax filing status, and how long you held the stock. Short-term capital gains tax applies to assets bought and sold within a year. This tax rate is the same as what you’re charged on ordinary income. Long-term capital gains tax is typically lower. Holding stocks for at least a year could translate to a lower tax bill.

4 Tips for Investing in Stocks

Here are some tips to help you invest in stocks wisely:

Take Advantage of Employee Benefits

If you have a 401(k) at work, start there. It’s a simple way to buy stocks, bonds, and other securities. Contributions are made through automatic payroll deductions, and the money you put in is tax-deductible. If you have an employer match, all the better.

Leverage Stock Funds

These are investment vehicles that allow you to buy a wide range of holdings. Exchange-traded funds (ETFs) and mutual funds provide built-in diversification and are generally seen as less risky than individual stock picking.

Diversify Your Portfolio

One way to mitigate investment risk is to spread your investments out across different asset classes. You can diversify even further within those categories. This prevents you from having too many eggs in one basket. If one part of your portfolio loses value, gains in other areas can help balance things out.

Work with a Financial Advisor

They can provide personalized investment guidance. The right financial advisor will also look at your overall financial health and help you plan for the future.

The Bottom Line

Being strategic about how you trade stocks could lead to better returns and a lower tax bill. It’s also a key part of rebalancing your portfolio. Your approach will depend on your investment goals, timeline, and appetite for risk.

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