What constitutes a lot of money is relative. Investing $ 10,000 looks different depending on factors such as your annual income and the size of your stock portfolio. Therefore, this article will not be a one-size-fits-all game plan or something that speaks to your particular situation. That said, there are solid and general investment principles that can guide a $ 10,000 investment no matter who you are.
Let’s see how to use $ 10,000 to continue your investment journey. To get an overview, I think investors should build up cash reserves, invest in successful companies, and build small positions in promising companies that still have a lot to prove.
Don’t neglect holding cash
Let’s start this discussion with two stock market data points: a general and a current. First, the stock market falls steadily and sharply. Over the past decade – one of the best decades ever for investors – there have been five declines of 10% or more. And during those declines, stocks of many quality companies fell far more than the market average of 10%.
Second, at present, stocks are quantifiable expensive in general. Looking at valuation metrics like price-to-earnings ratio and price-to-sell ratio, the S&P 500 average is the highest in more than a decade. True, valuations skyrocket when profits and sales fall. And over the past year, those are temporarily declining due to the COVID-19 pandemic. But valuations remain expensive nonetheless. This does not mean that a crash is imminent. But I wouldn’t be surprised if stocks fell 10% or more soon, as they have done several times in the past.
“Antifragile” is a term coined by mathematician and author Nassim Nicholas Taleb, and it means something that doesn’t break with problems – instead, it gets stronger. By keeping cash on the side, you put your portfolio in an anti-fragile position as you can profit from the chaos of the market by buying quality stocks at bargain prices.
There is no magic number for how much money you should have on hand. But having 10-20% of your portfolio in cash will put you in an enviable position when the opportunity arises. Therefore, if you have $ 10,000 to invest, make sure your cash reserve is full. One day it will be useful.
For what it’s worth, this strategy is how I built outsized positions in Square and Magnite – I bought both in 2020 when they were down over 50%. It might be a hand-picked anecdote, but the two have been multibags for a short time already, demonstrating the potential payoff of being prepared.
Building on a solid foundation
Long-term investors should build a diversified portfolio primarily with companies that have had past success, as this is where you will often find the winners of tomorrow.
A business like this to consider is United Rentals (NYSE: URI). This company rents equipment used in projects ranging from construction to manufacturing. Since purchasing equipment like this is expensive, it is often in a party’s best interests to lease it, allowing United Rentals to continue doing business. But management is also constantly aware of aging inventory and will sell certain items when there is more to gain from the sale than keeping it leased.
United Rentals has a long history of profit growth. And because of that earnings growth, the stock has hit 12 bags over the past decade. In the near term, the outlook for the company is also good, with the Congress infrastructure bill increasing spending in categories where it has a strong presence. And in the longer term, United Rentals has a great market opportunity. Consider this to be the largest rental equipment player in North America, but with only 13% market share, which suggests that the market is very fragmented. But with plenty of cash from operations (nearly $ 2.7 billion in 2020), management can grow through acquisitions. This manifested itself in the buyout of General Finance in May for nearly a billion dollars, a company offering storage solutions on construction sites.
With $ 10,000 there are good reasons to build a bigger position in United Rentals. Another solid business to consider right now is Focus on video communications (NASDAQ: ZM). If the company were a purely consumer-focused business, then maybe I would question its longevity in a post-pandemic (hopefully) world that will soon be. But Zoom is primarily an enterprise solution, with 63% of Q1 revenue coming from companies with 10 or more employees. Business customers are likely to keep their subscriptions active if they have a hybrid workforce (partly at home, partly in the office), even if they use Zoom less in the future than in 2020.
However, with one foot in the door, Zoom has the opportunity to sell its customers, which it is already doing successfully. Among customers with 10 or more employees, its first quarter net dollar expansion rate exceeded 130% for the 12th consecutive quarter. That’s four years of spending growth among these existing customers, which tells me this business has the power to stay.
Due to its peak year in 2020, Zoom now has around $ 4.7 billion in cash and marketable securities, giving it plenty of options when it comes to creating or acquiring businesses. other products and services for its corporate clients. What intrigues me in particular is that these new offerings will require new employees. And now might be the perfect time to find these new workers. Some reports estimate that millions of workers are currently looking for new jobs in a trend called the big resignation. And according to Glassdoor, most people enjoy working at Zoom, which means it should attract top talent where it’s needed.
For these reasons and more, I think investors should consider building a position in Zoom. However, remember that you don’t have to make full investments in Zoom or United Rentals all at once. With basic portfolio positions like these, buying stocks at set intervals – called averaging dollar costs – can help make sure you’re not buying everything at highs.
Make small bets too
By having money on the sidelines and building core positions in proven winners like United Rentals and Zoom, you are in a great position to finally make small bets on high potential companies that still have a lot to prove. . Real Estate Technology Company Latch (NASDAQ: LTCH) fits this description perfectly.
Homeowners sign multi-year contracts with Latch to provide connected hardware like electronic door locks for their rental spaces. And the company provides ongoing software to tenants. This revolving revenue stream provides a high degree of revenue visibility, making it easier for management to forecast financial results. For example, Latch’s management bolstered the credibility of their boards by releasing their first quarterly financial report since going public through a Special Purpose Acquisition Company (SPAC). Importantly, it reaffirmed its bookings forecast of $ 290 million to $ 325 million for 2021, which is a 76% to 97% year-over-year increase. This is good news given that many questionable SAVS drew advice shortly after their IPO.
Latch still has a lot to prove, but management is building up its credibility. Longer term, this team looked at their existing contracts and current opportunities and concluded that they could generate $ 249 million in Free Cash Flow (FCF) in 2025. Just as a perspective, many investors consider a price / FCF ratio of 20 would be a good value. Currently, Latch has a market cap of $ 1.8 billion. Therefore, assuming it hits its 2025 FCF target, it could be a $ 5 billion business by then – more than 2.5 times in just four years. It would definitely beat the market.
So far my advice has tried to use your $ 10,000 investment to make your wallet more anti-frag. But an antifragile wallet must also make asymmetric bets. Regarding asymmetry, Taleb says, “If you earn more when you’re right than you get hurt when you’re wrong, then you will benefit from volatility in the long run. This is the rationale for starting a position with a company like Latch. If you invest a small portion of your portfolio in a business like this – say 1% – you won’t get burned if it fails. But if he is successful, he could become a core portfolio position. And he would have earned it with fundamental results, making him a worthy long-term asset.
Ultimately, I think this is how investors should think about their portfolios no matter how much money they have to invest right now. Save money for rare bargains, build base positions in proven companies with bright futures, and place small bets that could pay off big if things go right. This way I think you are preparing your portfolio for long term success.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are heterogeneous! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.