I think the stock market gets a bad reputation from some "Millenials." Some see it as a get rich quick scheme, and others see it as a great way to lose money. I used to see it as a bunch of numbers, capital letters, or trendlines pointing in random directions.
It shouldn’t be so abstract! Simply put, the stock market provides a way to own a small piece of the best companies in the world. Owning great companies is an awesome way to become wealthy.
It’s a truth that the primary mission of all great companies is to make money. If they fail at this mission, they will go out of business. Thus, if you own great companies, you will make money over the long term.
So let’s jump right into How to Get Rich by Owning Companies
Where to Send Your Dollars to Work
Ok, so is it time to go out and buy the dopest new stock and get rich? Not so fast hot-shot….
Unfortunately, investors have proven to be generally terrible at identifying which companies will make them money.
The truth is that only 1% of investors have proven to be successful at beating the average performance of the whole market over long periods of time. This even includes professionals. People who literally spend 100% of their day researching companies.
You might be thinking: “If most pro’s can’t beat the market, then why should I try?”
Well, honestly Dick, you probably shouldn’t try. There’s a strong chance you will lose money and be turned off from investing for quite some time. You will lose out on early career money-gains and thus seriously compromise your retirement.
But don’t fret, Dick, because there’s hope!
In this article I’m going to teach you how to use the stock market as a tool to build wealth. I’m going to teach you how to ensure that you never lose money investing.
Instead of trying to beat the market, I am a going to teach you how to buy the market. When you “buy the market” you are buying an average of all the biggest and best companies in the United States.
How to Open A Brokerage Account
In order to invest in the wealth-creation machine that is the free market, you need to have an account with a brokerage.
To better understand what the role of a brokerage is, we need to define the terms. A broker is someone who manages your transactions, a brokerage is the company they work for.
In the past, investors needed accounts with brokerages so that they could be in contact with their stock-brokers. These were people who could make your investments for you.
The broker would take your money and make investments for you. Fortunately, this mundane process has been marginalized by technology, and although this leaves the position of stock-broker obsolete, the brokerages they once worked for remain.
Investors can now open accounts directly with brokerages, and without the help of stock brokers, they can use the online platforms provided by the brokerages to make whatever investments they want.
Schwab is my favorite option because in addition to offering brokerage services, they offer a high-yield checking account, thus debit card, along with online banking. This makes it a great option to be your one-stop-shop for a financial hub.
**Schwab also refunds all ATM fees and has no foreign transaction fee. It’s a pretty good deal. I swear this post isn’t sponsored.
How to “Buy the Market”
Ok, so you opened a brokerage account. What’s next? Congrats young buck, it’s time to make some great investments.
Great investments manage your risk through diversification. All of the most successful investors know how to manage their risk. In order to manage risk, my suggestion is to simply buy the S&P 500.
The S&P 500 is an index that tracks the performance of the top 500 companies in the United States. Generally speaking, these companies are unlikely to stop being successful innovators any time soon. Remember: their mission is to continually make money.
Simply put, if you buy the “SPY” you grow with America long term.
The easiest way to invest in the S&P 500 is to buy certain Mutual Funds offered by the brokerages you opened your account with. When you buy a mutual fund offered by your brokerage, you don’t pay a transaction fee and you can set up automatic transactions.
For example, the mutual fund I have 90% of my investments in are:
- VFINX: Vanguard S&P 500 Fund (.14% expense ratio)
- SWPPX: Schwab S&P 500 Fund (.02% expense ratio)
You may not know what an expense ratio is, and that’s ok. I will probably write about it in a future post. Just know that these expense ratios are essentially negligible, and won’t prevent you from generating wealth.
Can You Actually Get Rich?
Yes, by all accounts. No pun intended.
Since it’s inception, the S&P 500 has returned approximately 10% (before inflation).
This means that
- $10,000 invested in 1950 would be worth $7.7 million today.
- 10,000 invested in 1980, followed by $100 a month ($1200 a year) would be worth $950,000
Evidently, Compound Interest over time is a powerful thing. Time spent compounding is much more powerful then the amount of money invested.
It’s extremely important to get started invested early in your career, as this money will be working for you throughout your whole life.
Make it Automatic
The best investments improve the quality of your life. I used to invest in penny stocks, and then stress all day about small price fluctuations. This type of investing certainly did not improve the quality of my life.
The best way to build wealth is to invest an amount of money that you won’t really miss on a monthly basis. You won’t be stressed about your investments.
Also, You can set up automatic monthly investments into both Schwab and Vanguard Mutual Funds. Set it, and forget it.
Remember: Only invest money you won’t miss and don’t need tomorrow.
Since setting up automatic transactions, I have rarely looked at my investments. It definitely frees up mental energy to focus on other things that matter in life. Like writing these articles to help you guys learn how to invest!
Action Steps- How to Start Investing
- 3 Months living expenses emergency fund
- Open A Brokerage Account with Schwab or Vanguard
- Fund the Brokerage Account
- Buy S&P 500 Mutual Funds (VFINX or SWPPX)
- Set up automatic transactions (Set it, and forget it)
Disclosure: I am/we are long VFINX, SWPPX.