The ways people invest has totally changed over the last 10 years. There is no need to keep a stock broker on speed dial or to wait for quarterly statements in the mail. The digital world provides so many chances for everyday investors to create serious wealth over time – if you know how to approach it.
If you want to grow your money steadily throughout the years without making mistakes, you have come to the right place. Let’s discuss how to invest (and grow your money) in a digitalized investing climate.
Understanding the Digital Investment Revolution
Investing digitally is more than just using a different platform instead of on the phone, it has fundamentally changed how we look at opportunities in the markets, analyze them and manage the portfolios that we have. The barriers that restricted the average/small-time person, away from investing methods that were more involved and benefited the user, have been broken down.
If you try to put it in some historical context, twenty years ago, real-time market data cost in the thousands of dollars a month. Today you can get it for free on a smartphone. This democratization of financial information has leveled the playing field – while also developing new roadblocks.
The only thing you are trying to learn through this is how to be able to differentiate valuable digital tools from flashy distractions. Not all investing apps or platforms are designed with your long-term best interest in mind. Similarly, not all financial information circling social media is worth your attention.
Building Your Digital Investment Foundation
Before investing in a strategy, you have to have your foundation built. This would include an understanding of your risk tolerance, investment time horizon and your own financial goals. The beauty of digital investing is that many now have sophisticated questionnaires and tools to help you get an idea of your risk tolerance based on your stated objectives.
You want to start with a realistic picture of your financial situation. Determine how much you can reasonably deploy towards investing each month without it impacting your day-to-day life (keeping in mind any short-term emergency savings you need to consider). Then develop your time horizon, knowing whether you are investing for retirement in 30 years, or a down payment on a house in 5.
After you have an idea of your situation and time horizon, pick platforms that accommodate those ideas. Look to have low fees, have tools with a strong security network, and have educational materials to use. The flashiest app is not necessarily the best for long-term growth.
Diversifying in the Digital Era
Diversification continues to be one of the most vital precepts of investing, but digital tools have made both easier and less expensive than ever. You are not limited to picking individual stocks or expensive mutual funds through brokers the old-fashioned way.
Exchange-traded funds (ETFs) have become a cornerstone of smart investing in a digital world. ETFs allow you to have ownership of 100s or 1000s of stocks with one buy, and these 100s or 1000s of stocks will automatically spread out your risk of ownership versus an individual stock. Best of all, there are numerous digital platforms that let you buy and sell ETFs without a commission.
You may want to think about a core portfolio of broad market ETFs (S&P 500, international, and bonds) that provide you with an immediate diversification of thousands of companies in all corners of the globe. Then you can build out from there with smaller positions of sector-specific ETFs and/or stocks that you thoroughly researched with the time and/or ability you have.
It is equally important to diversify geographically too. The U.S. stock market is not always going to be the best-performing stock market, and eventually equity exposure to developed international markets and emerging markets can smooth your returns over time.
The Value of Dollar-Cost Averaging
One of the biggest perks of digital investment platforms is the ease and comfort of consistent investing. Dollar-cost averaging — investing every month or week at the same amount whether the market is up or down — is a simple but effective investing plan that only digital tools could make almost effortless in your portfolio.
Most digital investing platforms offer an automatic investing component. You have the option to perform transfers each week or month to simply have the money pulled out automatically to purchase your selected investment(s). This will take away the emotional aspect of your trading, and hopefully cause you to buy your shares when prices are lower, and fewer when the price is higher.
The psychological benefits are just as significant as the financial benefits. When the market declines (because it will), you will be much less likely to panic sell if you have established the habit of contributing to an investment account on a regular schedule. Instead, when you invest when the price lowers, you will purchase more shares, which will position you for much better future returns when the market recovers.
Using Technology to Conduct Research and Analysis
Digital investing platforms provide access to an array of research tools that only professional investors used to have access to. Learning to use these tools effectively will greatly improve your investment decisions.
Let’s start with the basics. Understand how to read financial statements, analyze price charts, and understand key metrics such as price-to-earnings and debt-to-equity. Many digital platforms now offer resources that walk you through basic concepts one step at a time.
Do not get overwhelmed with utilizing every single tool. Limit your focus to a few key metrics that matter for your investing style. If you are a long-term investor, you should focus more heavily on fundamental analysis (as opposed to about price movement in the short-term).
Social sentiment tools can be valuable; however, you should take them with a grain of salt. Many times, what is popular on social media has little relevance regarding the company’s long-term viability.
Tax-Efficient Digital Investing
Digital platforms have also made tax-efficient investing considerably easier. A service that many expensive financial planners used to provide includes tax-loss harvesting, which digital products like robo-advisors can now provide at lower fees.
You should fully exploit these tax-advantaged accounts first. IRAs and 401(k)s provide tremendous advantages. One benefit is that digital platforms allow you to easily manage these accounts alongside your taxable investments.
Many platforms will even assist you when it comes to determining the best allocation of assets across different account types.
If you’re investing through taxable accounts, it is important that you are aware of the tax implications associated with your investments. Place tax-efficient investments like index funds in taxable accounts, while tax-inefficient products like REITs can be placed in your IRA.
Managing risk in a connected world
Digital investing introduces several unique risks to the investing process which did not exist during the days of paper and phones. Cybersecurity should be at the forefront of your priorities if you choose to invest digitally. Make sure you are utilizing strong passwords, enabling two-factor authentication, and being cautious about accessing your investment accounts on public wifi.
Having access to real-time information, while we all love the access to all the information through our digital devices, can lead us all to overtrade. If you have real time access to your portfolio balance, you might be tempted to check it several times per day and make impulsive actions and decisions based on short-term movements in the market. Set limits for yourself and consider limiting the number of times, you check your investments to once a week at best!
Finally, many investors fall into the trap of following investment advice from “influencers” on social media platforms and/or discussion forums online. Be careful to do your own research and always remind yourself, the people posting their “wins” online almost always forget to document their losses.
Staying the course through market volatility
Ultimately, long-term investing success is going to come down to your ability to remain disciplined, in both good and bear markets. Digital platforms make it easy to check on your investments regularly, and that is a great thing, unless you are not extremely careful.
Market volatility is a normal and expected part of the markets. Since 1950, the average market has undergone a correction (at least 10% decline) about once every two years. Over these longer periods, however, the market does trend upwards.
During periods of market weakness, it’s easy to throw your hands in the air and abandon your strategy, but the data shows the person who stays invested through the volatility often gets better long-term results than the person tries to get in and out of the market to time their investments.
Wealth Created By Compound Growth
The real power of long-term digital investing comes from compound growth. When your investment grows and THEN generates return on return with growth, your wealth can grow rapidly over time.
This is why waiting as long as you can, to invest as much as you can, is very important. Even fairly smaller monthly investments (in the beginning), can turn into a lot of money over that time frame if you go long enough.
For example, if a 25-year-old were to invest $200 a month for 40 years, assuming a %7 growth rate they would have more than $525,000 when they retire at age 65.
Digital investment platforms right now provide all of the calculators and projections to show you this and keep you motivated in the event that we see a correcting/declining market.
The Future of Digital Investing
As technology continues to develop and grow, there will be even more opportunities for long-term wealth building. This week in the news, we have read about the next generation of AI being used to assist in developing more advanced portfolio management tools and blockchain’s impact on different asset classes.
However, these platforms are all built on the same key principles of investing: Holding a diversified portfolio, continuous investment over time, low costs, and a long-term viewpoint. It doesn’t necessarily matter if you are using a smartphone app or a platform like Immediate Connect, you will still be using the core strategies.
The success of digital investing is not based on access to the coolest tools or latest trends. It comes down to developing a sound overall strategy, consistency in following your strategy or plan, and allowing for time and compound growth to be in your favor. Focus on the fundamentals and continue educating yourself. Recognize that building wealth is a marathon to endure, not a sprint to be done.
