The Best Stocks to Pick in 2021

Clickbait warning: I’m literally going to tell you to buy the S&P 500 index. If you’re down with that then we’re pretty much done here. But if you’re hoping to find the next $TSLA or $APPL then I’m sorry for misleading you. Instead I’ll be talking about the difference between growth, value, and dividend stocks, blue chips, ETFs, pennystocks, and how to strategize your portfolio with room for some sexy speculative stocks. I’ll tell you the best stocks at the end of this blog!

One of my favorite books (A Random Walk Down Wall Street by Burton Malkiel) aims to humble the professional traders that claim they can pick the right stocks and outperform the market. He said, and I quote:

A blindfolded monkey throwing darts at a newspaper’s financial pages could select a portfolio that would do just as well as one carefully selected by experts.

Burton Malkiel

Don’t get me wrong, there are people that are exceptionally talented at curating a portfolio that performs better than the market average. But even the best of the best need to be humbled. In 2008, Warren Buffett wagered $1,000,000 to any hedge fund manager (a group or firm of people that buy & sell stocks 24/7) that could outperform the S&P 500 index over the next 10 years. Spoiler alert: they did not win the money.

This continues the great debate between passive and active investing strategies.

Passive Investing: An investment strategy aiming to maximize profits by minimizing buying and selling. Most commonly done by investing in a market-tracking index fund such as the S&P 500 over a long time horizon. Passive investing is epitomized by a buy-and-hold strategy. Buy-and-hold refers to buying a stock and holding it for a very long time. The less work you put into it, the more passive it is. Basically it’s the exact opposite of a new, hot & sexy stock.

Active Investing: An investment strategy aiming to maximize profits by buying and selling frequently to secure profits, stake advantageous entry positions, and hedge against volatility. This generally requires one to watch stock charts, follow niche-specific sectors, and research about a particular company’s financials. Active investing aims to take an aggressive growth-oriented approach and is epitomized by trying to time the right buy-and-sell points. These provide great stories when things have gone well, or become hard-learned lessons when they don’t.

While there is some merit that active investing can yield greater returns, it usually doesn’t work for the everyday investor. In fact, Fidelity Investments found that the people who had the best portfolio performance were those who had forgotten their login info. There’s often misinterpreted talent when observing market returns on a short period of time, especially during historic bull runs. Did you pick the right stocks? Or were all of the stocks the right ones? The long term passive investment strategy almost always yields greater overall returns.

Time in the market beats timing the market.

The less emotion involved with investment strategies, the better. My grandfather taught me ‘never get married to a stock.’ You’ll fall in love with your best performing asset and be so blindsided by your returns that you forget to sell it before it takes a huge nosedive. At which point you start to panic, decide to sell your shares, ultimately regret selling your shares, and finally decide to buy back in. Congratulations, you’ve just broken one of the most fundamental rules of investing:

Buy low, sell high. Not the inverse.

— All Successful Investors

The most common question I get is, “which stocks do I recommend buying?” to which I always reply, “I’m not qualified to give you advice or recommendations on what to invest in.” I wish I could give you the best stocks to pick but the truth is nobody can. However, I will happily share my strategy and explain why different types of stocks may be better options for you depending on your personal risk tolerance, time horizon, and overall investment preference.

Risk Tolerance: In regards to the stock market, risk tolerance has to do with how well you can handle swings in performance. While we certainly wish that stocks only go up, the reality is they rise and fall over the course of your investing lifetime. If you are comfortable risking your money for the potentiality to make a lot of money, you are risk averse. On the other hand, if you are not comfortable with the possibility of losing your money, you have low risk tolerance. Neither of the two is necessarily better than the other; however, substantial gains almost always requires a substantial risk. Even a 200% return on $10 is only $20.

Time Horizon: In regards to finance and investment strategy, time horizon is the general amount of time you wish to see your investment last. The time horizon you need to invest in can help determine what type of investments are most ideal for you. For example, if you want to invest for 30+ years for your retirement, you have a longer time horizon which can allow for riskier investment strategies because you have longer time to recoup any unsuccessful stocks. On the other hand, if you’re saving up money to buy a house in 3–5 years, you have a shorter time horizon where it would be foolish to risk a substantial amount of money, seeing as you would need it for the down payment.

  • Extremely short time horizon: day trading & week-over-week trades (24–168 hours)
  • Very short time horizon: quarterly trading (3–12 months)
  • Short time horizon: 1–3 years
  • Medium time horizon: 3–5 years
  • Long time horizon: 5–15 years
  • Very long time horizon: 20–30+ years

Now, let’s look at some of the most common stock types:

Growth Stocks are, as the name implies, stocks expected to grow more rapidly than the average market return. The companies issuing these stocks typically reinvest their revenue into themselves for growth and innovation as opposed to paying dividends (profits) to their shareholders. Investors earn money by buying them at a lower price than what they anticipate them to grow into. As such, there is usually a greater risk amongst growth stocks compared to dividend stocks, as investors could lose substantial capital if the company fails to grow.

Value Stocks are stocks that investors believe to be undervalued, using factors such as the company’s financials, price/earnings ratio, and price relative to its market capitalization. If the listed price for the stock seems lower than expected, value investors will buy the stock. The value of stocks are driven up both by a company’s success as well as the perceived value from the public. Since value is factored by more than a company’s financial picture, no one can say for certain if a stock is undervalued. Benjamin Graham is considered by many as a pioneer of value stock investing.

Dividend Stocks are stocks that pay the investor a percentage of the company’s revenue. These stocks usually come from companies with a well established record of increased growth projections, a positive earning per share, and sustainable financials. Dividend stocks are ideal in retirement or tax-advantaged accounts because they contribute towards capital gains and can be taxed as income. The goal is to live off of your dividends when you have accumulated enough dividend stocks to cover your living expenses.

What’s the difference between a stock like $APPL and $ZOM?

Blue Chip refers to a large company with a well known and reputable history of success. They are a well-established company with a track record of strong financials and consistent earnings, often paying dividends to their investors while maintaining steady growth. These companies typically have market capitalization valued in the billions, and often are one of the top 3 businesses in their industry. Apple Inc, Berkshire Hathaway, Walt Disney Corporation, and Coca-Cola are all examples of Blue Chip companies.

Characteristics of Blue Chips

  • Lower Risk
  • Lower Volatility
  • Longer Time Horizon
  • Higher Dividend Payout
  • Slow and Steady Growth

Penny Stocks refers to companies whose stocks trade for less than $5 (used to be less than $1). These are typically new and emerging companies but occasionally can be a well-known company on the brink of bankruptcy. Penny stocks have a significantly higher volatility due to their future’s uncertainty and extremely unreliable financial trajectory. Not all penny stocks are available to purchase on the NYSE (New York Stock Exchange) and can only be purchased on OTC (over-the-counter markets) bulletins. Bio-Pharmaceutical companies are typically notorious penny stocks that fall victim to large pump & dumps (the rapid buying and selling of stocks to instigate buyer activity). Many penny stocks don’t survive.

Characteristics of Penny Stocks

  • Higher Risk
  • Higher Volatility
  • Short-Term Time Horizon (usually)
  • Lower Dividend Payout
  • Fast, Sporadic, and Spontaneous Growth (hopefully)

Exchange Traded Funds are a group of securities (like stocks, bonds, commodities, and other assets) that can be bought and sold throughout the day like regular stocks. The most common ETFs are designed to track the performance of particular indexes, such as the S&P 500, Nasdaq, and other large-name institutional funds. ETF’s are kind of like variety packs of candy. Instead of just getting a Snickers, you also get some Twix, some Laffy Taffy, Butterfinger, Crunch, etc. This gives you a higher chance of finding a candy [stock] that you do like [performs well].

ETFs aren’t reserved for only tracking major indexes. There are also ETFs that consist of major stocks that pertain to a particular sector, such as big tech companies, consumer goods companies, electric vehicle development companies, green energy companies, etc. Some of the most popular ETF’s that track the market indexes are:

  • $VOO = Vanguard 500 Index Fund
    This ETF (managed by Vanguard) parallels the performance of the S&P 500.
  • $VTI = Vanguard Total Market Index Fund
    This ETF parallels the performance of the overall stock market.
  • $SPY = SPDR S&P 500 Index Fund
    This ETF (managed by SPDR) parallels the performance of the S&P 500.
  • $VWO = Vanguard FTSE Emerging Markets Index Fund
    This ETF parallels the performance of smaller up & coming businesses listed on the Financial Times Stock Exchange (London).
  • $VXUS = Vanguard Total International Stock Index Fund
    This ETF parallels the performance of most of all of the stocks available internationally.

These aforementioned ETFs are funds that track the particular index they relate to. They are managed by a firm, such as Vanguard, to maintain the assets equal to that particular index. This is a very small handful of the hundreds of ETFs that all track major market indexes.

These are other ETFs that don’t track indexes, but track the major stocks within a particular sector:

  • $VOX = Vanguard Communications Services
    This ETF contains the largest telecommunications stocks such as Verizon, AT&T, and other related companies.
  • $XSW = SPDR S&P Software Services
    This tech-based ETF tracks the S&P companies relating to the development and innovation of software services
  • $ICLN = iShares Global Clean Energy
    This ETF tracks companies committed towards working towards alternative energy sources such as solar power.
  • $LIT = Global X Lithium & Battery Tech
    This ETF tracks companies that are working towards more efficient and clean battery technologies.
  • $MJ = EFTMG Global Cannabis & Marijuana
    What do you think this ETF tracks?

An ETF is arguably the best way to get yourself a handful of stocks without having to figure out which company is the best one. It’s kind of like going to a horse race and betting on all of them, instead of putting everything on Seabistcuit II. Only in this scenario you actually make decent money. When the stocks within an ETF does well, the entire ETF does well.

An ETF certainly sounds like the perfect plan for prosperity. There are some drawbacks to be aware of: Since an ETF is managed by a fund, they do have an expense fee that affects the overall performance. Even though the expense fees are typically very low, having excessive fees could eat into your overall gains.

Another downside to ETFs are their all-or-nothing trajectory during both positive upswings as well as negative sell-offs for a particular sector. For example, if a particular ETF tracks the major commodities like crude oil and coal, then the ETF could potentially lose a lot of value if other ‘green energy’ companies become more popular, thereby halting the sales and revenue of the oil and coal companies. Similarly, ETF’s that track the international stock market could be liable to a country’s economic hardships as well.

Lastly, some ETF’s trade at a high volume with low liquidity. This means that it may be challenging to buy and sell shares if there are fewer shares available than desired. While ETF’s are a great tool for every investor, it’s important to recognize that they do have their own inherent risks.

Going back to the topic of the blog: What are the best stocks to pick in 2021? According to every financial guru, advisor, journalist, blogger, economist, etc., the best stocks to pick are those that track major market indexes, such as the S&P 500. This was true for 2000, 2010, 2020, 2021, and for many many more years. The average return from the S&P 500 over the last 100 years is annualized to 8–10% per year. While you might come across the occasional $APPL or $TSLA, the best long term strategy is a low cost ETF that tracks the S&P 500. I can imagine your frustration when you’ve made it this far only to find out that the best stock to pick is simply a little bit of everything.

So let me meet you halfway. Actually more like 95% of the way. The concept of a balanced portfolio is the same as a balanced diet. It’s probably not the most exciting, flavorful, or immediately gratifying course of action, but it provides you with sustainability. Your investment strategy, just like your diet, should be sustainable and unfaltering. Remember rule number 1: Don’t lose money.

This means that 95% of your portfolio should follow strategic investments that will reward you in the long run. If you follow a balanced diet [portfolio], you won’t lose any progress from the occasional slice of cake [risky investment]. But if you follow a diet revolving purely around cake, you won’t get very far before consequences catch up.

Finally, the fun stuff:

Speculative stocks (and other high risk investments like cryptocurrency) should make up no more than 5% of your total investment portfolio. This is the part where you ‘gamble’ on a stock (or security) you speculate will do well in the future. These can range in risk categories from penny stocks and cryptocurrency to large blue chip companies that pay out nice dividends.

Speculative trading involves adequate due diligence, or research, into the company or asset you want to invest in. If in your research you find that the company appears undervalued, will have a great product line up, and is making financial moves to grow, then you might invest into the company hoping that you’ve picked the next $TSLA. The drawback to speculative trading is the obvious risk associated to it. Not only are you ‘putting all of your eggs into 1 basket’ you also expose yourself to the psychological nuances of watching your stock either perform very well or perform exceptionally poorly. We’ll have to talk about the psychology of investing later.

Speculative trading requires a set plan with an entry point and and exit strategy. In other words: know when to hold ‘em and know when to fold ’em. Unfortunately you can’t bluff your way through a bad hand. By giving yourself an exit strategy, you avoid the inevitable “I’m gonna hold onto this stock because I think it’s going to go higher.” Furthermore, it also prevents you from doubling or tripling down on a stock you’re “certain will go up soon” when you really should’ve just pulled the plug.

I will be honest: my best performing asset came from speculative trading. About 3 years ago I downloaded Robinhood to try my luck with the stock market. At the same time, I was in the process of building my own gaming PC and was debating between using an Intel Core processor or an AMD processor. Naturally, I did a lot of research on the performance differences between the two and learned that AMD was in the process of developing a brand new line of top-tier CPUs. At that point I decided to invest in $AMD, and I bought 15 shares at an average price of $8. I continued to research and discovered that Intel was also spoofing their CPU performance to meet market standards.

Pro Tip: If the company’s main competitor is found of a scandal like this, expect to see their shares fall and the other one rise. I immediately bought another 25 shares of $AMD at an average price of $10. Every now and then the price would go up, and then dip back down, and then I’d buy some more.

Suddenly $AMD gained traction and was a ‘hot buy’ from all of the analysts. The stock jumped to $25 and I felt like the next Warren Buffett. I immediately sold a lot of my shares to get a nice profit. Over the course of the next 3 years, the stock went up and down between $15 — $30, then between $30–$60, and now it’s sitting around $90. I still have a decent handful of shares left, but I find myself occasionally feeling upset that I didn’t just hold onto all of them. But for this very reason, I know that even if I were to discover the next $TSLA, I wouldn’t cash in the million bucks, because every human would have sold before they went that high. It only hurts after we put on the hindsight glasses.

I’ve got a lot of positions on other speculative stocks, ranging from cannabis ETFs and BioPharm penny stocks. I don’t consider these to be investments; I look at them as speculative bets. You should never invest more than you can afford to lose, especially into speculative stocks. If you do get lucky and find the next $TSLA, just remember: no one ever got poor from selling a profit. While the pain of the what-ifs will haunt us, the pain from missing a profit will kill us. I would rather sell all my stocks for 200% profit (even if they continued to 1000%) than getting greedy at 200% only to see them tumble back to 0.

Buy low, sell high.

Disclaimers & “Influencer” Notes

The aforementioned information is compiled from books, articles, and journals available for all. I have summarized them as best as I could to help simplify some of the technical details of the stock market. This blog is for discussion and education purposes only. As such, I am not writing this as a recommendation of what to buy or how to invest your money. You must accept full responsibility for your investment decisions and consult a licensed fiduciary advisor for more information.

Also, I love free stocks. But I’m not an influencer and I don’t write these for a living, nor will I ever put them behind a paywall or bombard them with advertisements. I want to help you start your path for financial independence. As such, if you would like to start investing you should use this link to open an account on Robinhood. If you use my link, we both get a free stock (valued anywhere from $5 to $500) and I’ll be super happy. You’ll be super happy! And better yet, you get another free stock for each person that you refer. #gains

Archives

If you want to navigate through my other blogs, you can use this archives section.

Blog 1: The Fastest Way to Double Your Money — Manage My Money (Part 1)
This is the why behind the how. This blog broadly covers the importance of why you need to start investing ASAP.

Blog 2: Money Now or Money Later — Manage My Money (Part 2)
This is the step-by-step plan you need to follow so you can get yourself investing ASAP in 2021.

Blog 3: The 5 Best Investment Platforms You Need to be Using in 2021 — Manage My Money (Part 3)
I share some of the investing platforms that I’ve been using and I give my pros/cons on which ones I recommend. There’s also some referral links that’ll give both of us free stocks!

Blog 4: Compounding Interest — Investor Insight (Part 1)
This blog breaks down the beauty of compounding interest to give you enough information on why you need to start investing ASAP.

Blog 5: Pick the Right Retirement Account in 2021 — Manage My Money (Part 4)
This blog breaks down the differences between Roth and Traditional retirement accounts like a 401k and an IRA. It’s all about strategizing your taxes!

Blog 6: What to Do if Your Stock Drops — Investor Insight (Part 2)
In this blog I share some strategies you can use to help mitigate potential losses in your portfolio, such as dollar cost averaging and tax loss harvesting.

Blog 7: Even if You Bought $TSLA 10 Years Ago You Wouldn’t Have Become a Millionaire
In this unusual blog I break down the reality about survivorship bias and our overconfidence in our ability to hit the home runs. I demonstrate how non-buyers remorse when it comes to stocks like $TSLA should not hinder your decisions in the future.

Teacher, trainer, coach, and finance enthusiast!