90% think that stock investing is about picking the right stock …. it is not.
Investment vs Gamble
It is not a gamble, but all about strategic investment. It is not about guessing which stock will rise or fall, but about asset allocation.
Stock picking is a gamble and a game. If you get lucky, you profit. Yet, most of the time it is hard to retire by stock picking because no one can predict the future.
2 types of stock investment
There are 2 types of stock investment:
1. capital gain trading
You can trade stocks and profit from the difference in prices when you buy and sell. This is one type of stock investment — profiting from capital gain.
2. dividend income
The second type of stock investment is to buy and hold stocks for dividend income. This provides passive income and cash flow.
Stock investment 101 (how to invest in stocks for passive income and early retirement FIRE)
Your choice of the type of stock investment depends on your goal.
If you are looking to gain some quick profit, you would probably be looking at capital gain stock trading. On the other hand, if you are looking to have passive income for retirement or financial freedom, you should be aiming for dividend income from your stock investment.
Vocabulary definition
Gambling means taking chances of unvalidated gossips. It is exciting and unpredictable.
Investment means having a plan of stock asset allocation and following it (despite the boredom and lack of excitement). It is relatively predictable despite the uncontrollable market changes.
Asset allocation means having a fixed percentage of investment in each asset class to keep a balanced stock portfolio that gives the desired amount of income.
As the value of different stock asset classes rises and falls, you may buy or sell to keep the portfolio balanced according to the targeted percentage and allocation. This is also called rebalancing.
Rather than picking stocks, you will do better if you set the asset allocation percentage and follow the plan to invest in stocks.
Stock asset class
Here is a non-exhaustive list of different stock asset classes for examples:
US large-cap
US small-cap
US REIT
Emerging market
International large-cap
International small-cap
International REIT
When you design your stock portfolio for dividend income and retirement, the stability of income is a priority concern. So we would try to spread our investment around different asset classes such that if one class does poorly in a certain year, others can still provide reasonable income to support our living.
For example:
US large-cap 20%
US small-cap 5%
US REIT 20%
Emerging market 5%
International large-cap 20%
International small-cap 10%
International REIT 20%
We are taking the guesswork out of the stock investment game here because we are not betting on one particular stock or one particular country.
Ways to build your retirement portfolio
If you have a larger lump sum of money, you can wait for the right price to buy in the stocks according to your targeted asset allocation. You can do that in several phrases.
If you have small savings, you can set a monthly investment target and buy-in as many stocks according to your targeted asset allocation each month. If the price falls, you can afford to buy more. If the price rises, you buy less with the same amount.
The principle is to follow your plan of asset allocation to build the portfolio. And you can do that regardless of how much money you have at the moment.
Note: this is not investment advice. I’m not financial planning professional. Just sharing what is working for me as part of my investing strategy or what I have learned on my investment journey. Please be reminded to do your own research and consider your own circumstances before making any financial decisions. You could also check with your financial professional to understand what would be best for your situation.
