Investing in the Stock Market is Easier Than You Think
And everyone should be investing.
When most people think of investing in the stock market, they might compare it to gambling in a casino. They might think it’s something only the rich do. Or maybe more recently, a get-rich-quick scheme.
Investing in the stock market is none of those things, at least, not if you do it with a long-term goal in mind. And virtually everyone has big long-term goals, such as reaching a life stage as expensive as retirement.
More and more, the burden of saving for retirement falls on each of us. Unless you’re fortunate enough to work for the rare kind of company that still provides them, or you work for some level of government, you’re not going to have a pension waiting for you when you retire. And Social Security faces its own (however exaggerated) uncertain future and may not be enough for you to live the life you want in retirement.
The reality is, if you want to retire someday or achieve financial independence — that is, when work becomes optional — you need to own assets that grow in value and produce income. Cash, which inflation degrades over time, won’t be enough.
These income-producing assets can be stocks, bonds, real estate or a business. But for the most part I’m going to focus on why stocks are the default investment for the average person that doesn’t know a lot about investing and doesn’t want to spend a lot of time thinking about their money. Most people are too busy with other aspects of their lives to spend hours each week researching their investments. All you need is a basic foundation of investing knowledge that will set you up for life.
Investing apps like Robinhood may have introduced many young investors to stocks, but the way many people trade on these platforms — buying stocks they heard about on Reddit, pouring their life savings into high-risk tech stocks — isn’t necessarily ideal. So what’s a better way?
First, you’d be well-served by avoiding individual stock investments. Many people boast of their winning stock picks, but fewer talk about fortunes wiped out by the wrong investments. Most people who pick stocks end up losing money.
Rather than handpick stocks and hope you’ve picked one that makes you rich, you would see much greater long-term success investing in a basket of preselected stocks through a mutual fund or exchange-traded fund (ETF), investments that pool money to invest in hundreds or even thousands of stocks.
Mutual funds or ETFs that passively follow an index, such as the S&P 500, give you broad exposure to a country’s stock market. Index funds give you access to a diversified portfolio of stocks without having to research individual companies. They give you the average performance of the market or a certain segment of the market in exchange for low fees.
The vast majority of investors can achieve the broad exposure they need through just three, two or even a single index fund.
By investing in a country’s stock market, you’re investing in the long-term growth of publicly traded businesses of that country. You put your faith in the ability of companies to continue creating new products, apps, services, etc., that people will want to buy and that will improve the lives of an ever-growing population. You essentially earn a piece of the nation’s wealth.
When it comes to where to hold these index funds, you have seemingly endless account options. The default would be a taxable brokerage, which as the name suggests, means you pay taxes on all your earnings. But a long-term investor would benefit even more from investing inside a tax-advantaged account, such as an Individual Retirement Account (IRA) or a 401(k). These accounts either give you a tax break up front when you put money in or a tax break when you take money out at a later time, depending on which type you choose or your employer gives you.
Investing in index funds inside tax-advantaged accounts can make even the most average middle class wage earner a millionaire by the time they retire. Given time, investing discipline, and the power of compounding, you can grow your wealth and create a stable financial future.
This may seem like a lot for beginners. And unfortunately, many in the financial industry have a vested interest in making investing seem more complicated — and expensive — than it has to be. But what might seem daunting at first can be made more simple.
This is All About Money, a newsletter about money basics, investing and building wealth. I hope this newsletter can unpack and demystify some of these topics and many more, including:
How much do I really need to save for retirement?
Isn’t the stock market risky?
How do I choose investments inside my 401(k)?
How do I create and stick to a budget?
What’s the best way to pay off debt?
I hope to put out weekly content in the form of explainer-type articles at first, and we’ll see what this evolves into from there. If you’re interested in learning more, consider subscribing.