How to profit from US stocks

There is a popular adage among long-term investors: “Time in the market is ahead of the market.” In short, this means that one of the common ways to profit from US stocks is to adopt a buy-and-hold strategy, where you hold stocks for a long time rather than engaging in frequent buying and selling such as trading.

This is important because investors who are constantly trading in and out of the market on a daily, weekly or monthly basis tend to miss out on opportunities for strong annual returns. Consider this example, the US stock market returned 9.9% annually to those who invested in the 15 years to 2017, according to Putnam Investments. So entering and exiting the market on a daily basis may jeopardize your chances of getting returns like this.

Exiting the market on its best day obviously translates into very little returns. While it may seem like an easy solution to make sure you always invest in those days, it is impossible to predict when they will be. This means that you have to remain an investor for the long term to make sure that you are capturing the US stock market at its best.

Secondly, in the article on profit from US stocks, diversification. Seasoned investors know that diversification is key to reducing risk and potentially increasing returns over time. Think of it as the investment equivalent of not putting all your eggs in one basket.

Although most investors gravitate towards two types of investing: individual stocks and equity funds, experts usually recommend using the latter type to increase your diversification. While you can buy a bunch of individual stocks to simulate the diversification you automatically find in funds, it can take time and a good deal of smart investment to do this successfully.

Funds, on the other hand, give you exposure to hundreds or thousands of individual investments in a single share. While everyone wants to put all their money into the next Apple (AAPL) or Tesla (TSLA), the simple fact is that most investors, including professionals, have no certainty about what might happen to those companies and how good the returns would be.

This is why experts recommend most people to invest in funds that passively track major indices, such as the S&P 500 or Nasdaq, which allow you to benefit from average annual returns of around 10% with ease.

Thirdly, in the article on profit from US stocks, reinvestment of profits. While the small amounts you get in a dividend may seem small, especially when you’re first starting out investing, they are responsible for a large portion of the stock market’s historic growth. From September 1921 through September 2021, the S&P 500 saw average annual returns of 6.7%. But when I reinvested the dividends, that percentage jumped to nearly 11%, because each return you reinvested buy you more shares, which helps your earnings multiply faster.

This enhanced complexity is why many financial advisors recommend that long-term investors reinvest their dividends rather than spend them. Most brokerages give you the option to automatically reinvest your profits by signing up for a Dividend Reinvestment Program, or DRIP.

Finally, in the article on profit from US stocks, the need to choose the right investment account. Although the specific investments you choose are undoubtedly important to your long-term investment success, the account you choose to hold is also important. That’s because some investment accounts may give you a host of tax benefits such as tax deductions now (traditional retirement accounts) or tax-free withdrawals later (Roth). Whichever you choose, both allow you to avoid paying taxes on any gains or income you make while holding the money in the account.

But you should know that these benefits come at a cost. You generally can’t withdraw from retirement accounts, such as 401(k)s or Individual Retirement Accounts (IRAs), before age 59 without paying a 10% penalty on top of any taxes you owe.

Of course there are certain circumstances that allow you to take advantage of this money early without penalty such as onerous medical costs or dealing with the economic fallout of the Covid-19 pandemic. But the general rule is that once you put your money  into a tax-advantaged retirement account, you shouldn’t touch it until you reach retirement age.

Traditional taxable investment accounts do not offer the same tax incentives but allow you to withdraw your money whenever you want and for any purpose. This allows you to take advantage of some strategies, such as tax loss harvesting, which involves converting losing shares into winners by selling them at a loss and taking a tax break on some of your gains.

All of this means that you need to invest in the “right” account to improve your returns. Taxable accounts may be a good place for you if you will need your money in the next few years, but if you plan to keep your money for the long term, tax-advantaged accounts may be more suitable.

Most brokerage firms offer both types of investment accounts, but make sure the firm you choose has the type of account you need.

If you want to profit from US stocks, you don’t have to spend your days speculating about which individual company stocks might go up or down in the short term. In fact, even the most successful investors, like Warren Buffett, recommend that people invest in low-cost index funds and hold them for years or decades until they need their money.

The tried and true key to successful investing may sound a little boring, but you just need to be patient until the investments pay off in the long run.

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