Don't Fear the Stock Market!
Stocks, Bonds, Mutual Funds, Index Funds, Dividends, Expense Ratio
These are all terms that scare the “stuff” out of the non-investor. The list can go on and on from bear market, bull market, capital gains, to yield, all of these are terms keeping people from reaching the financial freedom they always dreamed about. If the stock market and its terms turn you off, you are not alone! I was in the same boat not too long ago!
I literally thought it was a gambling game where the rich was getting richer, and you were better off just saving your money in a savings account. I literally was like hey, my money doesn’t lose value in a savings account. With my extra money in a high yield savings account, my money would actually still grow 1-2% without losing value at all. I realized how naïve I was until I started educating myself on the stock market. I was missing out on so much “free” money by being scared my money would loose value for a short amount of time.
J.L. Collins’s book, Simple Path to Wealth, changed my whole mindset on the stock market. It’s actually not that complicated. The overall issues lie on the individual investor. We can spend money on clothes, eating out, and entertainment, but will not invest in the same companies we spend our money on because we technically can’t reap the benefits of the investment immediately.
You are already investing in the company when you purchase their product, but the catch is, you are not getting any return.
Let’s break it down. You could take the same $200 you would use to purchase a pair of Jordan’s or Nike’s and invest it in Nike instead of buying the shoes. Unless you are in the shoe resale market, you are loosing 100% of your money at purchase time. On the other hand if you invest it, your money might drop 30% in a very bad year, but Nike’s stock actually went up over 15% so far this year, and has gone up over 90% over the last 5 years. Let that sink in for a second. Your $200 could of resulted in $30 in a year or $180 over 5 years with you not doing ANYTHING.
I know you are already thinking, I don’t need that extra $30. But what if you invest more than $200? Would the returns be worth it then? The fear of losing money keeps individuals from investing in the stock market, but if you were like me, you still spent the “extra” money on material items or experiences. The rich stay and become wealthier, because they leverage the stock market, real estate, and business ventures to allow their money (“investments”) to make more money for them while they do not allocate time to actually make the money.
This is how you grow your net worth. The key to all investing is knowing it’s a plan for the long term and not the short term gain. For example, Jay-Z did not become a billionaire over night. It was almost 30 years in the making. But if he cared about the short term gains in his decision making, he would not be the hip hop billionaire he is today. Even Jay-Z himself has admitted to missing opportunities to invest due to spending money on material purchases.
I bought every V12 engine Wish I could take it back to the beginnin' I coulda bought a place in Dumbo before it was Dumbo For like two million That same building today is worth twenty-five million Guess how I'm feelin'? Dumbo - Jay-Z
I’m here to tell you, you can build wealth faster by investing your extra money instead of letting it sit in a savings account. Now, you need an emergency savings account, but it should not be more than 6-12 months of income maximum. Some would even say that is too much, but I digress. Basically, you will not become wealthy from a savings account. You have to take the risk for the reward, but I’m going to show you how to manage the risk with education. Below are tips or facts that will help ease your anxiety about the stock market.
1. The stock market naturally grows over time!!!
Over the past 30 years, the stock market has averaged 8-10% annual average growth. That’s the whole market! Yes, some companies have tanked in 30 years, but there are the Amazon’s of the world who averaged over 90% annual stock price growth over the last 5 years. Amazon’s stock literally grew over 450% in 5 years! If you bought 3 shares of Amazon stock for $990 in November 2014, your $990 investment would be worth $5,361 as I write this. Now, just think if you invested MORE money and actually bought MORE shares.
To level set, the interest gained on most high-yield savings accounts as I write this is 1.74%. Saving $990 in a high-yield savings account would only result to $1,078.18 5 years later. Chances of picking Amazon stock to grow where it is today are low, but there are ways to maximize from that growth without owning Amazon directly.
2. Invest majority of your money in Index Funds and ETF’s
For those unfamiliar with index funds or ETF’s (Exchange Traded Funds), they are types of financial securities that hold a collection of other securities (such as stocks). Index funds are mutual funds that track a specific index such as S&P 500, Dow Jones, of Total Stock Market. Mutual funds are actually managed by financial companies such as Vanguard and Fidelity. They control the purchase of stocks for each fund. With index and mutual funds, you get a collection of stocks. That means when you invest in index and mutual funds, you actually own a piece of stock from multiple companies.
ETF’s (Exchange Traded Funds) are very similar to index funds, but are listed on the stock exchange and can be traded throughout the day. This means, the price of an ETF fluctuates throughout the day similar to stocks. Another difference between ETF’s and index funds are how capital gains are realized for taxes.
Index funds typically require investors to payout capital gain taxes yearly, while ETF’s will typically only require investors to payout capital gain taxes during the year of sale of the ETF shares. These payouts only incur if you are investing within a brokerage account and not a tax advantage account like a 401k or IRA.
You can simply manage your investment risk by investing majority in your money in index funds and ETF’s. With these securities, you do not have to do the research needed to vet out companies to invest in. You simply will own stocks of multiple companies and will have easily diversified your investments.
3. Invest in high dividend stocks
If you are unfamiliar with dividends, they are distributions from the company’s earnings paid out to the shareholders on a scheduled basis. Most companies pay out dividends quarterly, and the payout depends on the company’s dividend yield. For example, Target has a high dividend yield at 3.57% and has paid out $2.60 per share to share holders in 2019. If you own 100 shares of Target stock, you would get $260 in free money and this does not account for the growth of the actual stock price.
Dividends are a way to build passive income. Dividends do not require you to trade time for money. The cool thing about index funds and ETF’s is the fact they have dividends as well. One of my favorite ETF’s, Vanguard S&P 500 ETF (VOO), paid out $4.142 per share so far in 2019 with one more estimated payment around $1.30. The dividend yield for VOO is 1.93, so that means its stock price is definitely higher than Target’s stock price, but you will still benefit from dividend payouts while weighing your risk.
4. Buy stocks from Companies you frequently use or spend money with
You are already investing in these companies with your time and money, so why not invest in them for your own financial gain? Prime example is Target. My wife spends some much time and money shopping at Target. It would be a no brainer for her to invest her extra money with Target instead of continuing to save in a savings account. Companies you use a lot can include Google, Apple, and Facebook. How many countless hours are spent on Facebook and Instagram via mobile phones developed by Google and Apple, so why not invest in them?
5. MOST IMPORTANT – DO NOT PANIC WHEN YOU LOSE MONEY
Remember the stock market has proven to grow over time. The S&P 500 index alone has had 74 positive years versus 24 negative years since existence. It has grown 10% annually since inception, so just because it drops does not mean panic and sale your stocks! Better yet, when the market drops that is the perfect time to invest MORE! The key to all investing is to buy low and sale high. Remember, investing should not be focused on the short term gain, but focused on the long term gains and always remember the bigger picture!