Part of what's going to help you thrive is to set yourself financially so you're in a position where money becomes less restrictive later. Where it’s not that you have a vast amount that you can live a lavish lifestyle but where you have more than enough to cover your expenses and do what you want in moderation. To eventually get to a point where money is not so much of a concern whether you have enough to make necessary purchases and investing your money today is a great way to do so.
There are so many different things to invest in, invest in a friend’s business, invest in real estate, investing collectibles, trading cards, stocks, bonds, invest in antiques. There's a long list of things to put your money in and you’ll hear stories of people making a big profit in selling a certain toy or action figure. This can grab our attention thinking that we also can do the same but it kind of builds up for a big disappointment based on someone else’s fortune. Usually when we hear cases like this, they're rare events that are not likely to happen but we might pursue it anyways because we get all wide eyed with excitement.
What to invest in
Invest your money into what's known as the S&P 500 which are the 500 leading performing publicly traded American companies. Companies like Apple, Amazon, Google, Netflix, JP Morgan, Visa, Nike, the well-known companies. The S&P stands for Standard and Poor 500 index. The great thing about investing your money into this index is that you don’t have to pick individual stocks of companies trying to predict how well certain ones will do. It takes the guessing work out of it and is known as passive investing. It provides peace of mind that you can grow your money with very little work.
You don’t need to know company specific information or even stock market specific information to build wealth. As long as you keep the money invested in the index it will grow as evidenced by its performance with a compounded annual rate of about 10% per year dating back to 1957. This might not seem like a lot, but it is a lot better than parking your money in cd’s that yield 1-5% and way better than having the money sit around and do nothing. With inflation on average being 2% per year, in 10 years money that is at idle loses 20% of its value, not having the same buying power.
Another great thing about the S&P 500 is that companies that are underperforming consistently are kicked out and replaced by better companies and this helps to ensure that value is being added. There is no need to worry about a company going bankrupt and your money going to zero because consistent weakness in individual companies are left out. 30 years ago, the best performing companies in the S&P 500 were not the same companies leading them today.
30 years ago, companies like Ford and GM and General Electric were the leaders in the indices. These are automotive and industrials leading the way. Today the companies that are leading the S&P 500 are those like Apple, NVIDA, Google and Amazon. 30 years from today it's going to be another set of companies that are leading the way. These are technology companies now at the forefront. This really takes the guesswork of figuring out who’s going to be leading and don’t have to worry about underperforming, it keeps you on par.
It’s important to know that if you decide to invest in the S&P 500 to avoid buying and selling thinking that you can time the market because the stock market is very unpredictable. When things are going well it can seem like they're never going to end, only for a big downturn to occur and then when that does happen the urge is going to be to want to sell because of fearing that it will lose more of its value. Come to condition yourself that these downturns are part of investing, it might seem that you can jump in and out of the market to avoid some of these downturns, but it is extremely hard.
There's always going to be uncertainties out there but don't let that stop you from continuously being in the market and continuously putting more money to work. In fact, the best returns come when there is a lot of turmoil going on where things are looking bleak because many people are waiting for things to get better. Come to understand that in the market there's never an all-clear signal because when more certainty is known most of the gains already occurred.
Actual numbers
Since 1957 the average compounded rate of return for the S&P 500 has been 10% per year. Some years it's a lot higher and some years it's a lot lower. Some years there's negative returns so just understand that that's part of investing there's will be certain downturns that can feel very unsettling but there's will also be times where exuberance is in the air but understand that that also will not last. Trees don’t grow to the sky; it just appears that way.
If you were to just invest in the S&P 500 with an initial amount over $1,000 after a year it would be worth approximately $1,100 so you'd profit $100 on paper. If you don't take profits, where you sell your investment amount, you're not going to be taxed for it. If you were to just leave the initial $1,000 investment alone and not put in it anymore after five years it would be worth approximately $1,600. After 10 years it would be $2,600. After 15 years it would be $4,177. After 20 years it would $6,700.
This just emphasizes that the more time you have your money working for you in the market the more it's going to grow. The beginning always takes a little bit of time. You're not going to see these big gains so the more time that you can have your money in the market working for you the greater chance you have of growing wealth.
There are some very useful tools to help calculate how much your money would grow with monthly or yearly contributions. Use the money you have leftover and buy the S&P 500 index monthly. Just like when you're paying your bills you make it a habit of just buying whatever you can even if it's $50 or $25, it will make a difference in the long term. Prioritize saving a certain amount of money so you can continuously invest.
Calculate how much expenses you have and see what's leftover. Evaluate your expenses to see where you can trim the fat so you can have more money allocated to grow your wealth. Come to ask yourself when you're about to make a purchase if it's a need or want. Obviously, you need to take care of your needs like food, water, and shelter but if it's just a want of a new pair of shoes or a new shirt then maybe you can bypass that and have a little bit more money to invest in.
When you can have this financial discipline of continuously putting money to invest in monthly. You dollar cost average which reduces buying too high. Every year the stock market has some pretty dismal periods where the indices go through a few days’, weeks and even months where things are going down by 5, 10 15% or more and buying 12 times a year helps take advantage of those down days, where you get the S&P 500 at cheaper prices.
In 1957 when the S&P 500 was created it was valued at 386 points and today it is now valued at a little over 5,000 so that is an increase of 5,137% during that time. With an average annual rate of return of 10%, every 8-9 years it would increase by 100%, effectively doubling your money and then doubling it again in 16-18 years. This might not seem very exciting to patiently wait for your assets to grow but it is a proven way to grow your wealth. Letting your money sit there and work you’ll start to see noticeable growth at years 23 and beyond.
How to invest
You can open a brokerage account which is where you put money in to buy the S&P 500 and you can park your money there. Some brokage accounts are Charles Schwab, Interactive Brokerage E*Trade, Robin Hood, so many different options but just find something that you're comfortable with that you can navigate your way through it.
When you select a brokerage account the good thing about it is the money that you invest you can access it whenever you want, just whatever gains you profit from you'll pay taxes on it each year only when those gains are actually realized when you cash it in. If you have a far longer time horizon and don't need to access that money for several decades you can open an individual retirement account known as an IRA or a Roth IRA as they have tax advantages. Just figure out what fits you best.
Brokerage accounts work like a bank account where money comes in and you have an account balance and then to actually purchase a specific index you just got to know what to look for. You can invest in the S&P 500 through what's known as ETF's which are exchangeable traded funds that are baskets of securities that are traded like individual stocks. This means that those 500 companies within the S&P 500 are all included in a specific ETF.
Depending on what the ETF is geared for some are going to be equal weight which means that each company is accounted for on an equal percentage basis. This really helps to spread some of that risk out when certain companies are not doing well that it's not going to weigh down the performance. Others are going to be a little bit more overweight where maybe the largest companies make up a greater percentage of the ETF that can really swing your performance in a big way, so this is bigger risk bigger reward.
But you're not the one figuring out the right balance of that. The professional running the ETF’s are the ones doing that. Really the only decision you need to make is how safe you want to play it or how risky you want to be.
If you're leaning more to the safer side, you can invest into what's known as the Vanguard S&P 500 value ETF and these names all have what's known as a ticker symbol which is an abbreviation of their name, so their ticker symbol is VOOV. In the brokerage account when you're first looking to buy this specific ETF or even if you want to buy a particular stock you can type in the name and then that ticker symbol is the unique identifier that goes with what exactly you're looking for.
If you're looking to invest in a higher performing ETF then the Vanguard S&P 500 growth with the ticker symbol of VOOG is a good vehicle to park your money in. But if you're looking to be a little bit more balanced where you have some safety and a little bit better performance you can settle in between the two and go with the Vanguard S&P 500 ETF with the ticker symbol VOO.
Prior to buying any of these ETF's just do a little bit of research and look at their historical performance, look at their expense fees because they do charge a yearly expense but they're relatively low compared to if you were to go with a financial advisor. You can find that these ETF's usually charge less than 1% per year to manage your money compared to other services they'll charge more per year which is eating into your gains. That might not seem like a lot but over several years and even decades that's less money you have.
Psyche of investing
Mentally prepare yourself before you actually put any money into one of the S&P ETF's. There's going to be the urge to want to look at it as often as possible, maybe even daily and just know that it's not going to serve you well. It's going make you impatient, leading to making rash decisions. You have got to continuously remind yourself that you're in it for the long term that you can ride out all the highs and the lows and not be so bothered by it.
It's about being even keeled maintaining your composure so you can be able to handle situations right now to be better off later on. To combat this just look at your brokerage or your retirement account once a month when you're going to put more money to work where you're buying more of the ETF. And if you don't buy it every month maybe you buy it every few months or so, that's the time to only look at it. Other than that, it's just going to keep you on edge.
Those downturns known as bear markets where it's loosely defined as the indices dropping more than 20% in a short period of time it will be very stomach churning where you're want to throw up and you got to really prepare yourself to handle it. Tell yourself things like this is just part of investing. Just like growth there will be periods of pain that you got to see it through to work it out and that's what those ETF's are doing, it’s working its way through different cycles and phases that the market is flushing out, going through some hiccups some bad news.
In the short term these downtimes can feel like all is lost and everything is looking very bleak. That is the time when things are most opportunistic. When everybody else is running for the hills and the market is selling off and you're seeing the value of your account go down that's really a signal that the market is on sale that you can get those valuable assets at reduced prices, so see it is that.
If not, the natural inclination is to want to go with the herd and flee where you want to pull your money out when it's lost its value or just before it loses its value. The concept of buy low sell high. The really difficult part is trying to figure out when to get back in. If you're waiting for the all clear signal then you're going to miss out on significant gains. In some down years most of the stock market gains occur over 8 to 10 days but just about nobody knows when that's going to happen so just stick with it, ride it out.
From day-to-day and even week to week you'll see your account balance bounce around maybe one week it's up 2%, the next week it's down 1-2% and it's probably going to bounce around but eventually you'll see maybe a 3% gain or 4% and then a 12% gain for the year. That's just part of being invested for the long term. If you're looking to make a quick buck then this is not the way to go, it'd be better served going elsewhere with your money.
Here's some things that can help you mentally prepare to keep your money invested in these S&P 500 ETF or index. The S&P 500 is a representation of the US economy, they're not always directly synced up, but the S&P 500 is a forward-looking mechanism to see where the economy is going to be. Part of that is recessions are going to occur, they are a natural part of an economy that occur every five to eight years on average.
It's a natural cleansing to remove the parts of the business cycle that are just not working so if we just look at 30 years ago from today the leading companies were automotives and industrials and now today they are technology companies. 30 years from now it's going to be something else, maybe health care, so it's weeding out the underperformance or the poor performers.
Final thoughts
Overall investing your money in the stock market is a great way to better develop yourself and grow your wealth. Your emotions are going to be tested and if you can see it through, you're going to gain greater emotional intelligence where you can manage yourself and see those difficult moments through. But also, where all that excitement doesn't get you to make big bets on things. Overall, this provides a balanced outlook that helps you just really thrive.
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