It may be our imagination, but everyone seems happy that 2020 is finally coming to a close. Investors were challenged not only by the coronavirus pandemic, but also by the extreme volatility of the stock market, which went from bull to bear and back again to raging bull -- all in less than a year!
If you're an investor, it's imperative that you set yourself up for success in 2021. The following tips from three of our Motley Fool contributors will help you get off to a good start.
Creating goals means creating wealth
Barbara Eisner Bayer: You can do this exercise to create more wealth in 2020 in less than 10 minutes: Take a pen and paper or head to your computer and set some realistic financial goals for the year that can motivate you and keep you focused, especially if the going gets rough.
Begin by creating a list of the things you want to achieve financially. Are you saving for a new house? Do you want to max out your 401(k)? Or are you going to create an emergency fund so that you'll never have to worry about losing your job or dealing with a healthcare emergency, as many did in 2020? Once you know what you want to achieve, write it down, as it's been scientifically proven that doing so will help you achieve your ambitions.
Next, create a plan as to how you'll get there. If you want to max out your retirement plan, for example, learn how much you're allowed to contribute and divide that by 12. Then, develop a plan to contribute that amount monthly, perhaps through automatic investment from your paycheck.
If you're saving for a house down payment, estimate the amount you'll need, then make sure you have a method to contribute the amount necessary on a weekly or monthly basis. Or if you're creating an emergency fund, write down how much you'll need and divide again by 12 -- that's the money you'll need to contribute each month to a liquid account (like savings or money market).
Be specific and realistic. If you're taking home $1,000 a week but your plan involves putting in $500 a week to meet your goals, the remaining $500 may not be enough to pay your other expenses, and you'll be setting yourself up for failure. And remember, you don't want to deprive yourself of the things you enjoy -- maybe just cut down a bit on the things you don't need to survive.
Finally, you may want to reward yourself in order to stay motivated. Maybe a massage or small purchase of something you love -- whatever makes you feel like you can't wait to achieve your goal. Unfortunately, according to a study by the University of Scranton that tracked the New Year's resolutions of 200 participants over a two-year period, "Seventy-seven percent maintained their pledges for 1 week but only 19% for 2 years."
Don't get caught in the losing crowd: By staying focused and committed, you have the power to accomplish your goals -- for 2021 and beyond.
Take a long-term approach
Katie Brockman: To be successful in the stock market, it's important to look at the big picture. This year has been turbulent, to say the least, and the market could experience even more volatility in 2021. But don't let that hold you back from investing.
While the stock market is always subject to short-term ups and downs, it generally sees positive returns over the long run. In fact, despite many recessions, economic bubbles, civil and political unrest, wars, and the countless other hardships the country has experienced, the S&P 500 has still experienced an average rate of return of around 10% per year since its inception.
If you're just getting started, don't get too hung up on what, exactly, the market will do in the next week, month, or year. Even if you invest now and the market crashes next month, remember that it's what happens over the long term that really matters. If you're waiting for the perfect moment to start investing, you may be waiting forever.
The key to investing for the long term is choosing solid investments that have a good chance of weathering any stock market storms. You may opt to invest in index funds or mutual funds, for example, or strong companies that have a proven track record of success. These investments are more likely to pull through tough economic times and market volatility, making them good long-term choices.
If you think you'll struggle with staying cool, calm, and collected when the market inevitably takes a turn for the worse, just remind yourself that when it comes to the stock market, what goes down must come back up. The market has always managed to recover -- and even thrive -- after every single downturn it's ever experienced. So no matter what happens in 2021, chances are good the stock market will pull through in the long run.
David Butler: Investors need to be pickier in 2021. In 2020, there was so much volatility that created huge buying opportunities when the market tanked on COVID-19 news. Multiple strategies worked. Deep-value plays paid off; trades on growth companies in tech were tremendous. Now, we're looking at all-time highs. It's a different ball game, and investors are going to have to be much pickier about what they're buying.
Look for stocks that haven't become inflated. I know, that's tough when one looks at the bullish run that we've seen this year. At the bare minimum, look at stocks that are creating a financial case that supports their premium pricing. It's cliche, but Amazon (AMZN 0.91%) continues to be an appealing stock. Its growth, along with improving earnings, is beginning to make its valuation more justified.
Tech has been the gem, and will likely continue to be so. That doesn't mean that you need to chase stocks like Zoom Video Communications. Microsoft (MSFT 0.67%) has outpaced the market by more than 400% over the past 20 years. The company has delivered double-digit sales growth annually for years and has a much more reasonable asking price.
While tech still controls the narrative for big market returns, there are other places to look. Target (TGT 0.92%) has demonstrated a clear and concise ability to drive sales. The brick-and-mortar retail chain is succeeding in combining online ordering and at-store pickup in just the same fashion that Walmart has done.
Whatever strategy, or sector, you're interested in, be picky. With interest rates so low, investors are getting pressed into equities to find returns. It's hard to not be bullish on the stock market with vaccines and the implications that a stimulus package can have.
What you don't want to do is chase things that have already happened. Look for stocks with good financials that aren't carrying price-to-earnings ratios of 100 times earnings.