Saving and investing are essential building blocks to financial success and creating generational wealth. With US Cannabis Market sales projected to grow to $30 billion by 2025, investing in cannabis offers a once in a lifetime opportunity that can’t be ignored. Ironically, I was restricted from recommending cannabis stocks when I was a financial advisor due to its federal illegality, however it was one of the most frequently asked about investment topics I would get when meeting with clients. If you’re not already, it’s time to start investing in 2020 and the burgeoning cannabis industry is worth considering as part of your strategy.
A few days ago I released a video, 4 Cannabis Stocks You Can Buy on Cash App on any Budget to encourage people that have been on the fence to take the leap and start investing. Here are 5 tips to help you start investing in 2020 and include cannabis companies in your portfolio.
Start With Your 401k
Believe it or not my first piece of investment advice is not a hot stock tip, but that the first place you should start investing is your company’s 401(k) plan. You likely won’t find any cannabis stocks there but there are a few reasons that this should be at the core of your investment strategy. The first, is that the IRS will allow employees to contribute up to $19,500 on a pretax basis to their 401(k), 403(b), or Thrift Savings Plan and an additional $6,500 catch up contribution for employees over the age of 50. This is a big advantage because it allows you to grow your investments tax free. Another reason that your employer’s plan is a good place to start is to take advantage of the 401(k) match program.
At a bare minimum you should be investing at least the amount that your employer will match or you’re leaving free money on the table. As a rule you should be saving at least 15% of your pre-tax income and try to work your way up towards maxing out your contribution. Most plans offer target date funds to automatically invest your money based on your current age and anticipated retirement date.
Diversification
Diversification is another one of the most important investment principles. The simplest way to explain this is the age old adage, don’t put all your eggs in one basket. You can diversify by buying stock in multiple different companies. An easy way for an investor with limited funds to experience greater diversification is by purchasing ETFs or mutual funds. Three of the largest cannabis ETFs are the ETFMG Alternative Harvest ETF the Horizon’s Life Sciences Index ETF and the Cannabis ETF.
Even if you’re super excited about cannabis investing your portfolio should include other sectors as well. Also, most investors’ portfolio should have some allocation to bonds along with stocks based on their risk tolerance and investment goals. Although diversification doesn’t guarantee against losses it can help to limit portfolio downside by spreading the risk.
Buy Low, Sell High
Cannabis stocks experienced double digit losses to close out 2019 but that doesn’t mean that the ship has sailed on the opportunity. As a matter of fact, it offers an even better entry point. Investing is a long-term game. One of the biggest mistakes that novice investors make is panicking and selling their portfolio when the market dips, which is actually the opposite of what seasoned investors do.
Historically speaking, the stock market has always gone up in the long term and we should not expect that to change anytime soon. If a company has sound fundamentals and you believe in the growth prospects of the industry declining prices can be viewed as a buying opportunity. Imagine if you went to the dispensary and the same bud from your favorite grower that was $60 an eighth yesterday is now on sale for $35 an eighth. You would probably consider taking advantage of the discount and buying a bit more. The same principle applies here. Investing can be very emotional but learning to show discipline can pay off huge. Despite average intra-year drops of 13.8% the S&P 500 has delivered positive returns in 30 of the past 40 years.
Investment Apps & Resources
Thanks to modern technology there is no shortage of options that make it easier than ever to invest. Last October, Cash App, the widely used money transfer app, started offering no fee stock trading. Another awesome feature is that you can buy fractional shares in denominations as low as $1. Robinhood, another popular investment platform that also offers zero fee stock trading recently announced that they will let you invest as little as one cent in any stock. If your primary goals is to invest in cannabis stocks the downside to both of these is that your choices are mostly limited to the large Canadian operators like Canopy Growth, Aurora Cannabis, Tilray, and Cronos Group. Robinhood however did offer access to some cannabis ETFs, as did another popular financial services, app SoFi. Another investment app that I like is Acorns, because it can be linked to your bank account allowing you to round up your transactions to invest your spare change. You can also most likely open a brokerage account at your bank or financial institution.
You’ll have to look to the more traditional providers like Fidelity or Charles Schwab if you’re interested in investing your money in the US based multistate operators. As of the market close on January 3rd the largest cannabis companies in the United States were Charlotte’s Web Holdings Inc, Green Thumb Industries Inc, Cresco Labs Inc, Curaleaf Holdings Inc, Trulieve Cannabis Corp, Harvest Health & Recreation Inc, and MariMed Inc, with each boasting valuations above $1 billion.
I’m personally excited to attend the CannaVest East investment forum for the first time, which takes place February 19-20 during the Northeast Cannabis Business Conference, and will teach attendees to evaluate cannabis investments and achieve better returns.
Private Investments
One of the most crucial ways that one should consider investing in cannabis, albeit the riskiest is through private investments. Currently thirty-three states and the District of Columbia have legalized cannabis for medical or adult use. As more states move towards legalization and existing markets mature there will be more and more opportunities to get your piece of the green rush by applying for licenses to grow, manufacture, dispense or provide testing for cannabis products. I personally got my start in the cannabis industry by quitting my job as a financial advisor to pursue license opportunities in Maryland and New Jersey. Most recently Illinois rolled out its program along with a $30 million fund to assist Social Equity Applicants that were most impacted by the war on drugs. Adult-use cannabis providers in the state saw $3.2 million in sales on their first day.
If you have the resources and acumen to pull it off starting your own cannabis business might be a great idea. Depending on your business plan total costs to pursue licenses can range between hundreds of thousands to even figures in the millions making access to capital one of the biggest barriers to entry. In most cases you will be at a loss of any funds you’ve invested if you are not successful so it offers the largest tradeoff of risk vs reward by far. Investing in a cannabis startup might also be a good option for an accredited investor with an annual income exceeding $200,000 or personal net worth above $1 million.