The Marijuana Industry Is Booming. Here’s What You Should Know Before You Invest In It

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Just 10 years ago, not many people would have considered the marijuana industry a good investment. But in less than a decade, marijuana went from illegal in all 50 US states to legal (at least in some capacity) in more than half of the states.

In 2021, it will be easier than ever for individuals to invest in the marijuana industry. However, we are not quite out of the “weed” when it comes to regulation and normalization of the cannabis sector. Until buying, selling and using marijuana is completely legal at the federal level for any purpose (recreational and medicinal), the industry is likely to continue to experience some volatility.

Keep reading to learn about the history of the cannabis industry, how to invest in marijuana stocks and ETFs, and the risks to consider before adding marijuana stocks to your portfolio.

About the Marijuana Industry

We must not forget that the cannabis trade is young. The US investable cannabis industry began a little over six years ago, in January 2014, according to Morgan Paxhia, the co-founder and director of Poseidon Investment Management.

Although recreational marijuana was legalized in 2012, companies didn’t open their doors for sale until two years later.

“This period was the first month of legal adult sales in Colorado and the beginning of a tightly regulated market,” Paxhia said.

Before January 2014, according to Paxhia, there were medical markets in the US as early as 1996. However, these markets were generally non-profit, so there was no equity and limited capital invested before recreational weed shops became a thing.

In the past seven years, 18 states and the District of Columbia have decriminalized cannabis for non-medical use, allowing the industry to grow by leaps and bounds. In fact, 2020 was considered by many to be a breakthrough year for the industry as legal sales were over $17.5 billion in the United States, up 46% from the previous year.

And as the marijuana industry in the United States grows, there are more opportunities to invest in it.

How to Invest in Marijuana Stocks

Individuals can invest in the marijuana industry by purchasing the shares of the companies in it. The companies operating in the cannabis industry generally fall into three categories:

Marijuana Growers and RetailersAdditional Product and Service Providers Marijuana-Focused Biotechnology Companies

The process of investing in cannabis stocks is much the same as in any other industry. These stocks are traded on US exchanges such as the Nasdaq, and you can buy and sell them through any major brokerage firm.

Before investing in general, it is important to do your research. This includes marijuana stock. First, look at the company’s financial performance since it went public. You can compare its performance with that of its competitors. Another way to analyze the company’s financial performance is to review the financial statements it has filed with the Securities and Exchange Commission.

As with any niche or alternative investment, personal finance experts recommend limiting marijuana stocks to a small percentage of your total portfolio. Many experts suggest having up to 5% of your investment portfolio in alternative assets such as cannabis and cryptocurrency. The rest should be held in broad, diversified index funds.

Top Marijuana Stocks to Buy in 2021

There are literally hundreds of marijuana stocks to choose from in 2021. As we mentioned, cannabis companies can fall into a variety of categories, including growers and retailers, support product and service providers, and marijuana biotech companies.

Some of the best marijuana stocks on the market today include:

Curaleaf Holdings (CURLF)Canopy Growth Corporation (CGC)Green Thumb Industries (GTBIF)Tilray (TLRY)Cronos Groups (CRON)

In addition to some of the newer cannabis companies in the industry, there are also companies that have been around and joined the industry for much longer. In fact, there are probably some names you recognize on the list. Those companies include:

Anheuser-Busch (BUD) Altria (MO) Scotts Miracle-Gro (SMG)

The advantage of investing in these companies is that they have a proven track record that goes back beyond their participation in the cannabis industry. And because marijuana is just one industry they operate in, they may be more isolated from some of the industry’s volatility. Remember that when it comes to investing, experts recommend diversifying your portfolio, which means spreading your investments across broad funds rather than individual stocks.

Investing in Exchange Traded Marijuana Funds

Instead of investing in individual stocks, you can also add marijuana exchange-traded funds (ETFs) to your portfolio. An ETF is a pooled investment that attracts the money of many investors and uses it to buy many different stocks. When you invest in an ETF, you are essentially investing in all of the stocks within the fund.

That said, cannabis ETFs are not without risk. Companies in any emerging industry face higher volatility and potential to fail, so investors should prepare accordingly. Investors should also check a fund’s expense ratio before investing, as industry-specific ETFs can charge relatively high fees.

You can mitigate these risks and costs by keeping cannabis investments to a small percentage of your total portfolio and the rest in broad index funds.

Pro tip

Investing in a marijuana ETF has the same benefits as investing in marijuana stocks, but with added diversification to protect your portfolio. If you’re new to marijuana investing, an ETF is a great place to start.

The Risks of Investing in Marijuana Stocks

Before investing in marijuana stocks (or anything for that matter), it’s important to consider all the risks and understand what you’re getting into.

“A lot of stocks in our space are going through big ups and downs,” Paxhia said. “2021 is a good example with several cannabis stocks rising significantly until February 2021 and then falling by as much as 50-60% from October 2021.”

Since the cannabis industry in the United States is still so young, this volatility is not necessarily a surprise. Still, it may come as a shock to investors who haven’t experienced extreme volatility in their portfolios before, or whose portfolios are too focused on cannabis.

Should You Invest in Marijuana Stocks?

As with any investment, anyone considering investing in marijuana stocks should do their research and consider why the investment would be a good addition to their portfolio. It is important to do your due diligence and understand the risks of this new industry.

If you’re considering investing in marijuana stocks or ETFs, get your other financial ducks lined up first. For example, make sure you are currently investing enough in your 401(k) plan or individual retirement account (IRA) to meet your retirement goals. You can use this online retirement calculator to determine how much you need to save.

Once you’ve prioritized your retirement savings and are otherwise financially comfortable, you can start adding cannabis to a small portion of your portfolio. But given the industry’s volatility, make sure you only invest money you can afford to lose.

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