The stock market is one of the largest wealth creators in the world. And thanks to new technology leveling the playing field, anyone can invest and see the same percentage returns as Jeff Bezos, Warren Buffett and Bill Gates. Of course, they have more dollars invested, but if you own just one share – or even a fraction of a share – of Amazon, Berkshire Hathaway or Microsoft, you’ll be up – or down – by the same percentage.
You can become a co-owner in some of the world’s best businesses. This is just one reason why I invest in stocks. And I’m about to cover a few more. Over the last 10 years I’ve gained a much deeper understanding of stocks and financial markets. Now, I’m sharing my best insight with you for free.
My Path to Understanding Financial Markets
As for my background, I double majored in Finance and Accounting. Then on top of that, I completed one of the hardest exam series in the world, the CFA exams. That involved three six-hour exams that covered over 6,000 pages of core study material.
I’ve slogged through all that to acquire the book smarts… and I still have a lot to learn. But along the way, I’ve also focused on gaining more of the street smarts. I’ve traded stocks, bonds, commodities, options and even cryptocurrencies. In one project, I sent out close to half a million dollars worth of Bitcoin. And to be honest, tension was a bit high on that one. There aren’t as many safeguards in place for those transactions.
I’m mentioning this to show you that the financial world is dense and ever-expanding. Although, you don’t need all that. You don’t need to know the difference between a portfolio’s duration and convexity to do well. There are a few simple rules you can use to increase your long-term returns, while minimizing risk. This could easily mean the difference of $100,000 or even $1 million plus in your portfolio over your lifetime.
Over the years, many brilliant friends have reached out asking for investing advice. Engineers, lawyers, doctors, etc. but all too often, I see them stuck in analysis paralysis when it comes to investing. They don’t know where to start or get caught up in marketing hype. So, this article and the video above are partially for them as well.
One of the biggest issues I see is unrealistic expectations. We all have those friends or coworkers who brag about their winning stocks or have hot stock tips. A lot of freshly minted Robinhood traders out there… but please take the winning stories with a grain of salt. We’re not as likely to hear about their losing positions. This can warp reality. And when I hear a few Uber drivers telling me what to invest in, it’s usually a better time to do the opposite.
Stock Market Risk and Returns
If you throw all of your money into one company, there’s always the chance it can go bankrupt. So, in response to that approach there’s the proverbial… don’t put all of your eggs in one basket. There are low cost funds that give you broad exposure to hundreds of companies. For example, the Vanguard S&P 500 ETF (VOO) expense ratio is a low 0.03%. These types of fees have come down astronomically in the last few decades. On top of the low management costs, most brokerages now don’t charge any trading feeds.
When looking at growth potential, the S&P 500 has returned roughly 8-10% annually over most longer timeframes. And to see the power of your investment compounding over many years, let’s use 10% and a one-time investment of $10,000. That would turn into…
This might seem far out, but time flies and a little delayed gratification goes a long way. If you don’t plan on tapping into your retirement savings for a few decades, stocks are one of the best places to invest your money. Historically, they have higher returns than most other asset classes such as bonds and real estate. I’ve even dedicated another video as to why I invest in stocks instead of real-estate (also, that excludes buying a home to live in).
Now, I want to be clear that stocks have been better long-term. In the short-term, 1-, 3- or even 5-years, the stock market could be down. So, if you need the money for some upcoming expenses, I’d advise against investing in stocks – and also having a hefty emergency fund saved up.
Stocks in the short-term are a rollercoaster. Once invested, it’s not fun to watch a 30% pullback in my portfolio. Although, over the long-term the U.S. economy pushes to new highs. That’s why I want to own a piece of it.
On top of that, timing the market in the short-term is a fool’s game. The world’s best investors can’t consistently do it well. So, one of the best approaches for intelligent investors is setting up recurring times to invest. Some go with semi-annually, monthly or even with every paycheck.
This systematic approach helps prevent the negative impacts of trading on emotion. You’ll buy in at some higher valuations… but you’ll also get in at some lower points as well. This balances out your average cost. It also prevents keeping too much cash on the sidelines. This has been one of my bigger mistakes…
While waiting for pullbacks, I’ve missed out on some healthy returns. And the cash on the sidelines has earned little-to-nothing in this low interest rate world… so, invest at recurring times and stay the course.
More Reasons Why I Invest in the Stock Market
To recap my big first point on why I invest in stocks, you can become co-owner in some of the world’s best businesses. That’s right alongside Elon Musk, Mark Zuckerberg and many others. You can claim a stake in the growing economy. And that’s even more important going forward with increasing wealth concentration.
Now, for my last two big reasons as to why I invest in stocks. Up first, they’re one of the lowest-cost and purest forms of passive income you can find. Unlike real-estate, you don’t have to worry about closing costs, finding tenants, maintenance, property taxes, insurance, legal fees, etc.
When you buy a stock, you buy a piece of the business and don’t have to worry about running it. And you can set up a steady stream of income by buying into dividend stocks or ETFs. That’s one of my favorite strategies.
The other big benefit is that long-term capital gains on stocks are taxed at a lower rate. Regular income from working tops out at a 37% tax rate. But if you hold onto your investment for more than a year, it tops out at 20%. This is a huge plus for saving and investing for the long-term. And if you’re holding it in a tax-advantaged account, your returns can grow tax free.
There you have it. These are the biggest reasons I gravitate towards investing in stocks. There are many other great benefits to owning stocks as well. And I’ve covered some of those ideas on this blog and my YouTube channel in the past… but I have more in the works. So, hopefully you’ll stick around 🙂
And as always, please let me know if you have any comments or questions.