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The Effortless Strategy for Investing in the Stock Market

When you think of stock market investing, trading is probably what comes to mind. It’s the strategy that’s been popularized by movies, WallStreetBets, and TikTok. They teach you that to be successful at investing in stocks, you have to investigate the stock market constantly to find hidden deals you can make millions off of. But few people hit it big, and who has a few hours a day to spend watching stock prices? Not me, and probably not you. 

While trading is a highly publicized investing strategy, it is the exact opposite of effortless and has an 80%+ failure rate, which actually makes it one of the worst strategies. The good news is that there’s a different way to make money investing in stocks that historically, has worked 100% of the time.

What is Long-term Passive Investing

Long-term passive investing is a buy-and-hold strategy where you build a well-diversified portfolio and take advantage of the almost guaranteed gains the entire stock market will have over time. It’s way less risky than trading and way easier.

Diversification

It works because it exposes you to hundreds or thousands of different companies across many market sectors, asset classes, and geographic regions. This diversification helps protect you from losing all of your money if one area of your investments is impacted negatively by something. For example, maybe one of the companies you’re invested in goes bankrupt. If you’re only invested in that one company, you’ll lose everything. If you’re invested in hundreds of other companies as well, this one company’s failure will have little impact on your money. That’s the power of diversification.

Time in the Market

The other reason long-term passive investing works is because your risk of losing money when you’re invested in the total stock market declines significantly over time. In fact, after 40 years of investing in the stock market, you have a less than 1% chance of losing money and a 95% chance of earning almost 3 times your initial investment. Those are pretty good odds.

This works because historically, the stock market as a whole has always gone up. There are dips and sometimes huge drops in the short-term, but thanks to diversification and compounded earnings, you’re essentially guaranteed a return if you can ride out the short-term bumps to take advantage of the long-term gains.

All-time returns for S&P 500 – Google Finance

But figuring out how to build a diversified portfolio and manage it for 40 years is still a daunting task. Traditionally, people hired a financial advisor and paid them hundreds of thousands of dollars in earnings over several decades to avoid having to do this work themselves. Luckily, with the help of technology, there are new cheap and effortless ways to invest in stocks so you never have to build your portfolio, manage your investments, or learn really anything about the stock market. 

Effortless Strategies for Investing in the Stock Market

Use a Target-Date Fund 

Target-date funds are the one-stop shop when it comes to effortless investing in retirement accounts. These include your 401k and IRAs. Target-date funds get their name because to find the best one for you, you select the target date for when you’ll want to sell your investments. Typically, these funds are offered in retirement accounts so that date is your retirement date.

Target-date funds are usually offered in 5 or 10-year increments, so choose the date that is nearest to your retirement date. When you do that, your fund will build your portfolio at the appropriate risk level based on the length of time until you retire. 

Not only will your target-date fund build your portfolio for you initially, but it will also manage it for you forever. As you age and get closer to your target date, your fund will update your investments to reduce your risk level. Remember, the longer you’re invested, the less likely you are to lose money, so the closer you are to retirement the safer your portfolio should be and vice versa. This will ensure that you maintain your investment earnings to use as income in retirement.

Use a Robo-advisor 

Outside of your retirement accounts, the best option for effortless investing is to use a Robo-advisor. Robo-advisors typically ask you a set of questions when you open your account to determine your investing risk tolerance. They then invest your money into one of their diversified portfolios based on your responses. If your risk preferences change, you can update your risk tolerance and your Robo-advisor will move your money into either safer or riskier portfolios. 

The Effort You Need to Make

There’s only one bit of effort that you need to make after you invest in a target-date fund or with a Robo-advisor, and that is to make sure you keep investing more money into it. The effortless way to do that is called dollar-cost averaging.

Dollar-cost averaging is a fancy way of saying automating your investments. It’s when you invest a fixed amount of money at regular intervals. 401ks use this strategy by regularly withdrawing a fixed percentage of each of your paychecks to invest for you. Once you set your contribution percentage, all of the investing happens behind the scenes without you having to lift a finger. 

You can use this same strategy in your other investment accounts by setting up automatic investments at whatever amount and frequency you’d like. If you want to max out your IRA accounts, for example, you can take the $6,000 annual contribution limit and divide it by your contribution frequency to determine the dollar amount of your automatic contributions. If you’re contributing monthly, you would divide $6,000 by 12 months to get a $500 per month contribution. Automating your contributions will ensure that you’re always investing and making more money with zero effort.

While investing is portrayed as being difficult and time-consuming, it can actually be effortless and stress-free. You just need to choose a method that builds and manages a diversified portfolio for you and automate your contributions. Then you’ll be passively investing and building wealth so you can focus your effort toward other things you love.

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Is Investing in Stocks Worth the Risk?

A whopping 90% of stock market day traders lose money, and many of their losses make incredible headlines. Think of stocks like GameStop, AMC, and Tesla. You hear about them all the time because their wild price swings make some traders millionaires while decimating other’s fortunes. One college student even committed suicide after seeing a negative balance of over $700,000 on his Robinhood Trading App.

All of this stock market drama probably has you asking, “is investing in stocks worth the risk?”

Risk vs Return

Making money in the stock market is all about weighing an investment’s risk against your expectations of a return. This is called the risk-return tradeoff. In general, when the risk of an investment is higher, you should expect a higher return for taking on more risk and vice versa. 

The investments that make headlines are usually incredibly risky. This is why some of the people who invest in these risky assets make an absolute killing, while others lose it all. That’s the nature of risky investments. They give us FOMO because we see people become millionaires overnight by investing in a single meme stock. Unfortunately, this FOMO often leads people to buy into an investment once the price has already peaked, and then lose everything when the price drops. The good news is that the risky stock market investing strategies used to make headlines aren’t the only ways to invest in stocks.

Trading vs Investing

Trading

Trading is the stock market strategy that we always hear about. It involves choosing individual stocks to invest in when the price is low and then selling that stock when the price rises. Traders typically only hold a stock for a few days, hours, or sometimes minutes before selling. 

The problem with this strategy is that it is nearly impossible to predict how a stock’s price will fluctuate in the short term. And if traders tell you differently, they’re lying. As was mentioned earlier, about 90% of day traders lose money. That means nearly all day traders are unable to predict how a stock’s price will fluctuate, and with those odds, you probably can’t either. 

Investing

Investing is the alternative to trading. It involves building a diversified portfolio of many different stocks and holding those stocks for years or decades. By spreading your investments across many different companies, or diversifying, you reduce your odds of losing money because a larger portion of your investments has to perform poorly to generate a loss. 

For example, let’s say that your friend invests all of her money into a single company, while you invest your money into an S&P 500 ETF. By choosing that ETF, your money will be invested in all 500 companies that make up the S&P 500. If only one of those companies is struggling, you have the other 499 to keep you afloat. Your friend, on the other hand, only has one company working for her and that means if they do poorly, so does she and vice versa.

Actively Managed Funds

When it comes to investing in diversified investments, there are two types of funds you can invest in. The first is an actively managed fund. These funds are curated by financial institutions to try to beat the market. That means that if the S&P 500 index, which is widely accepted as the best gauge for the overall US stock market, has a return of 10% this year, an actively managed fund tries to earn its investors a return greater than 10%.

The problem is that these funds often fail. Over a 15 year period, more than 91% of actively managed funds underperformed the S&P 500. Because of the research and analysis required for a fund manager to try to beat the market, they charge much higher fees, or expense ratios, to investors. These high fees substantially eat into your investment returns over time and can cost you hundreds of thousands or millions of dollars over several decades.

Passively Managed Funds

To save on fees, make higher returns, and reduce your risk, you can invest in your second diversified investment option, a passively managed fund. These include index funds and ETFs that track an underlying set of investments and provide the same return as those investments.

For example, if you invest in an S&P 500 ETF, the fund will provide you with the same return as the S&P 500 index. Because the fund manager doesn’t need to spend time researching and analyzing data to try and beat the index, the fees for passively managed funds are much lower. That means more of the returns you receive for taking on the risk of investing go into your pocket.

And if you stay invested in an S&P 500 fund for several decades, you have almost zero chance of losing money. In fact, the S&P 500 has had a positive return in all 20 year periods from 1872-2018. This is where the time factor comes into play.

In the short term, the stock market fluctuates wildly. For several months or even years, the S&P 500 can produce negative returns. If you only stay invested for a short time, even in a diversified investment, you risk losing money. The longer you keep your money invested, the lower and lower the probability is that you will lose money. You’ll at least break even.

But why even take on all of this risk and put in this effort to just break even? In a simulation of 10,000 investors that NerdWallet ran, based on the historical returns of the S&P 500 and Treasury bonds, investors had a 95% chance of earning nearly 3x their initial investment, while traditional savers had a less than 3% chance of doing the same. 

So is investing in stocks worth the risk? If you invest in diversified, low fee funds, for several decades, and are almost guaranteed to nearly triple your money, then yes. Investing in stocks is 100% worth the risk.

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How to Invest in Stocks with Little Money

One of the biggest misconceptions people have about investing is that you need to have thousands of dollars ready to invest before you can even think about dipping your toe into the stock market. If this is a thought you’ve had, you’re in good company, but you’re also wrong. 

The reality is that you can start investing today with a little as $5. There are tons of options for opening zero minimum investment accounts, no minimum investment funds, and countless platforms offering fractional shares. All of these efforts to democratize investing have made it incredibly easy for you to start investing with no money saved. Here’s how to do it.

Use Dollar-Cost Averaging

What Is Dollar-Cost Averaging

Dollar-cost averaging is an investment strategy where you buy stocks at regular intervals regardless of the price. Most people haven’t heard of dollar-cost averaging, but if you’ve ever invested in a 401k, you’ve used this strategy. 

When you invest in your 401k a certain percentage of your paycheck gets deposited into your 401k and invested every time you get paid. It doesn’t matter if stock prices are up on payday, or down, your money gets invested regardless.

You can use this same strategy to invest small amounts of money over time in other investment accounts, like IRAs and brokerage accounts, as well. Whether you have an extra $5, $20, or $100 a month to invest, all of your small investments will add up over time and create the large amount of money you think you need to have saved to start investing.

Dollar-Cost Averaging vs Lump Sum Investing

The theory behind dollar-cost averaging is that it reduces the impact of volatility on your investment portfolio. Volatility is the fluctuation of stock market prices and is necessary for you to make money investing in stocks (when stock prices go up), but it’s also what provides an opportunity for you to lose money investing in stocks (when prices go down). 

When you invest using dollar-cost averaging you buy the stocks in your portfolio at many different prices. Sometimes stock prices drop and you buy your stocks at a low price, and other times the market is up and you buy them at a higher price. When you buy at a low price, you make larger gains, and when you buy at a high price you make smaller gains.

You’re probably thinking, ok, well why don’t I just buy stocks when they’re at a low price then? There are 2 reasons for this. 

  1. You don’t have a lump sum saved to invest right now, and the longer you wait to invest, the more earnings you’ll lose from compound interest. Dollar-cost averaging is a long-term investment strategy, and the stock market has historically always gone up over the long term. If you start investing today, you’re almost guaranteed to make huge gains over time. There’s no need to save up and wait to perfectly time your purchase.
  2. It’s incredibly hard to time the stock market. If it were easy, everyone would buy stocks at the bottom of a market crash and sell stocks at the peak of a market expansion. However, no one, not even the pros, knows when the market is going to crash or peak. If you try to save up and wait to time your buy during a crash, you’ll probably time it wrong.

It’s also worth noting that if you had invested in the S&P 500 at market highs before the great recession in 2008 or the covid crash in 2020, as of today, you would have made all of the money back that you lost during those crashes, plus some. This is why you don’t need to worry about buying stocks at high prices sometimes, and what makes dollar-cost averaging an incredibly easy, low-stress, and lucrative investment strategy.

What Stocks to Invest In

Index Funds and ETFs

You know the phrase, don’t put all your eggs in one basket? Well, index funds and ETFs are firm believers in that phrase, and their diversification is what makes them great investments.

Typically, people think they need to be able to choose winning stocks to be a good investor. The bad news is that choosing winners is hard and is why so many traders, over 80% in fact, lose money. The good news is that index funds and ETFs take the guesswork out of picking a winning stock by combining many different stocks into a single investment.

Let’s take an S&P 500 index fund or ETF, for example. When you buy one of these funds, you’re actually investing in a tiny sliver of stock in all 500 companies that make up the S&P 500. For you to lose all of your money, all 500 companies would need to perform poorly. This does happen when the market drops in the short term, but as we mentioned earlier, the market has always gone up over the long term. When you buy all 500 companies in the S&P 500, you’re essentially buying the market, and therefore are pretty much guaranteed to make money over several decades.

Buying index funds or ETFs and holding them for long periods of time significantly reduces your risk of losing money in the stock market, which is a great first step, but you still need to construct a well-rounded portfolio that includes 3-4 different funds. If constructing a multi-fund portfolio sounds daunting to you, you can use a Robo-advisor or a target-date fund instead.

Robo-advisors

Robo-advisors are digital advisors that provide algorithm-driven investment services. When you use a Robo-advisor, you tell them certain things about you like your tolerance for risk and your investing goals and they build your entire portfolio and manage it for you based on your personal preferences. It’s a great option for people who want to be completely hands-off investors.

Target-Date Funds

Another great option is to use a target-date fund. These funds are typically available in retirement accounts like 401ks and IRAs, and they offer similar services to a Robo-advisor. 

When you use a target-date fund, you select the year you plan to retire and your target-date fund will construct and manage your portfolio based on your length of time to retirement. The further you are from retirement, the more risk your portfolio can handle, and the closer you are to retirement, the less risk your portfolio can handle. By investing in a target-date fund, you’ll end up with a well-diversified portfolio that will automatically become less risky over time. This is another great option for people who want to be completely hands-off investors.

Beginner Investing Tips to Remember

Now that you know how to start investing without any money saved, here are some beginner investing tips to remember.

Start Small

Investing $5 a month is better than $0 a month. No matter what your level of investment is today, it is better to start small than not start at all. When your income increases or expenses decrease in the future, you can increase your monthly investments. The most important thing is to start investing now so compound interest can help grow your investments.

Choose an Account and Funds with No Minimums

When you’re starting to invest with no money saved, you want to make sure you choose an account provider, investment account, and funds with no minimums. Some accounts and funds require that you maintain minimum balances, or have buy minimums. Avoid those when starting out.

If your ideal fund has a minimum buy, invest in a similar fund that doesn’t have a minimum until you can earn/contribute what you need to buy the fund you really want. Once you hit your goal, you can sell your current investments and buy into your ideal fund.

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Have You Been Finfluenced by These 3 Bad Pieces of Financial Advice?

finfluencers taking selfie

You know the phrase don’t believe everything you see on social media? Well, it doesn’t only apply to influencers’ waistlines and wrinkle-free faces. It also applies to the advice dished out by the newest category of influencer – the finfluencer.

Finfluencers are financial influencers and they make financial education fun by turning it into a meme or controversial quote and putting it into a beautiful Canva template. And I’m not throwing shade. I mean, I am one of these finfluencers. The problem is that many in this industry aren’t financial experts and shell out a bunch of trash finance tips. Even worse is that the trash tips are oftentimes to ones that go viral. They make you think to yourself, “OMG that makes so much sense! Why didn’t I think of that?!” And I hate to be the one to break this to you, but if it were as easy to get rich as some finfluencers make it seem, we would all be rich. 

If you want to actually start making progress on your financial journey, you’re going to have to stop believing the trash tips and start getting educated by real experts. To help you weed through the nonsense and find the good stuff, here are 3 very popular and very bad pieces of financial advice you may have been finfluenced by.

Invest in the Companies You Buy Products From

Hindsight is Always 2020

There are so many examples of posts that say things like, if you had invested $399 in Apple in 2001 instead of buying an iPod it would be worth a bazillion dollars today. The problem is that in 2001 we had absolutely zero clue that Apple would become the dominating force that it is today. Here are just a handful of the things that have grown Apple into the behemoth it is but didn’t exist back in 2001.

  • The iPhone
  • The App Store, which charges 30% to creators for most in-app purchases, subscriptions, and paid downloads
  • The Apple Watch
  • AirPods
  • And so. much. more. 

20 years later, of course, we can easily say how great of an investment it would have been to buy Apple stock back in 2001, but it was a much riskier investment back then. As they say, hindsight is always 2020, and that’s the reason these posts never tell you which company is the Apple of today and will be a dominating force 20 years from now. Because they have absolutely no clue.

Purchases and Investments Are Not Created Equal

Another reason you shouldn’t base your investment portfolio on companies you buy products from is because you don’t buy a product for the same reason you invest in a company. Let’s break down the difference between why you buy a product vs why you buy a stock.

Reasons for buying a product

  • It will make your life easier
  • It makes you happy
  • It’s functional 
  • You look damn good in it
  • And a million more reasons

Reasons for buying a stock

  • It will make you money. Period. End of story.

A company making a product you love doesn’t automatically make that company a good investment. I mean, everybody loved Blockbuster in the 90s and probably thought that was a great investment, but we know today that it wasn’t. Having a great product doesn’t equal longevity or good accounting practices, and therefore doesn’t always make the companies behind your fav products good investments.

On top of that, there are so many behind-the-scenes companies we don’t know the names of that are critically important to our lives and make great investments. These can be logistics companies, semiconductor manufacturers, foreign companies, marketing firms, you get the picture. There’s a whole world of companies that aren’t consumer-facing but are making lots of money and are great investments. If you only focus on investing in the companies you know the names of and buy products from, you’ll miss out on tons of great investment opportunities.

Dividend Stocks Are a Great Source of Passive Income

It’s true what the posts say. Warren Buffett makes millions of dollars every year investing in dividend stocks. But he’s a BILLIONAIRE. If you’re reading this, I’m going to go out on a limb and assume that you’re not a billionaire, which means that you shouldn’t be investing like Warren B. 

The reason Warren earns so much passive income from dividends is because of the massive amounts of money he has invested. The average dividend yield of the S&P 500 is only 2%. That means to earn the average median household income of about $70,000/year, you’d need to have $3,500,000 invested in dividend stocks. That’s a lotta dough.

And sure, some companies offer double-digit dividend yields, but you’ll miss out on a ton of earnings if you use your dividend payouts as passive income instead of reinvesting them. Check out this post @personalfinanceclub did on how much more money you can earn by reinvesting your dividends instead of using them as income.

A whopping 68% of the total growth in this example was made by reinvesting dividends. And I know the thought of just investing some money and living off of the dividends sounds great, but to do that, you need to have a ton of money invested. To get that much money invested, you probably need to be reinvesting your dividends. So skip trying to use your dividends as passive income and focus on the growth of your portfolio instead.

Invest in Aggressive Funds in Your 401k 

This one isn’t really a finfluencer problem, but it’s a huge problem nonetheless because one of the most popular investment accounts is the 401k. 

Contributing to your 401k is absolutely fabulous. You get tax benefits and many companies will match your contributions, which is an easy way to get a non-performance raise. The problem is that some of the funds marketed to you in your 401k can be better at persuading you to invest in them than they are at actually making you the returns they promise. Here’s how to spot the fakers. 

The main thing to look for is whether the fund is actively or passively managed. Actively managed funds in your 401k look super fancy and claim that they’ll make you a lot more money. What they don’t tell you is that they have much higher fees, AKA expense ratios. This is the fee you pay to cover the fund’s operations and management expenses, and the higher the fee, the lower your return. 

When the returns of actively managed funds were compared to the return on the S&P 500, 85% underperformed the S&P over 10 years, and a whopping 92% underperformed the S&P over 15 years.

So while these funds promise sky-high returns, they usually don’t achieve them after you factor in their astronomical expense ratios. And since you’ll most likely be leaving your investments in your 401k for over 15 years, you could easily fall victim to making less money by investing in these funds. Instead, invest in passively managed funds with much lower expense ratios to see better returns over the long term.

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How to Pay Significantly Lower Taxes on Your Investments

woman shocked at paying lower taxes holding money fan

You know that weird guy that just seems to creep up out of nowhere and scare the shit out of you every time he says hello? Well, that guy exists in the investment world too, and he pops up whenever you sell your investments. His name is taxes.

Anytime you realize profits from an investment you have to pay taxes on it, but it gets a little bit more complicated. Taxes, complicated? Who could have guessed it?!

The amount you pay in taxes depends on when you decide to sell your investment and what type of account your investment is in. If you don’t pay attention, you can end up getting slapped with a big bill come tax season, but if you strategize properly, you can use these two variables to reduce your tax bill and pocket as much of your profits as possible. Here’s how to do it.

Income Tax

Income tax is a marginal tax rate you pay on earned income. The money you earn from work is considered earned income, not the money you earn from your investments. So why are we including this? 

Well, most people invest in retirement accounts like 401ks and IRA, which are taxed differently than other types of investments. Most profits on investments are taxed at the capital gains tax rate (more on that later) but money invested in retirement accounts is taxed at your income tax rate. Depending on the type of account you use you either pay your income taxes before you deposit the money, or when you withdraw it in retirement. 

Tax-Deferred Retirement Accounts

When you cash out your investments from a tax-deferred retirement account like a 401k or IRA, you’ll have to pay income taxes on your distribution. That’s because, in a tax-deferred account, you deposit money that you’ve earned but haven’t paid taxes on. This is beneficial because all of the money you deposit into these accounts gets excluded from your taxable income now, so you pay less in taxes today. This not only helps reduce your tax bill but also allows you to add more money into your account, which over time, will significantly increase your earnings from compound interest. But, if you thought the government would just let you get away with not paying income taxes, think again. You know they only let billionaires do that. 

While you get to skip paying taxes before depositing the money into your account, you don’t get to do the same when you withdraw the money in retirement. That’s when you’ll get hit with the tax bill. Fortunately, unlike in taxable accounts, you can buy and sell investments within retirement accounts whenever you want and pay zero taxes on the trades. The tax bill only arrives once you start taking your distributions in retirement. And make sure not to take them before 59 ½, or you’ll also get hit with a 10% penalty.

After-Tax Retirement Accounts

To lessen the blow of income taxes in retirement, you can take part of your distributions from an after-tax account like a Roth IRA. All of the money deposited into a Roth IRA is after-tax, meaning you already paid the income taxes on it. When you withdraw the money later in retirement, you pocket it all completely tax-free. 

By contributing to both tax-deferred and after-tax accounts, you can optimize your distributions in retirement to reduce your tax bill.

Capital Gains Tax

Capital gains tax applies to investment income or profit you earn on your investments. It is taxed differently than earned income and comes in two forms. Capital gains taxes apply to investments in brokerage accounts, real estate, crypto, and other alternative investments.

Short-Term Capital Gains Tax

Short-term capital gains tax is like the ex you hope to never run into. Just when you’re starting to enjoy your earnings, short-term capital gains tax will come and rain on your parade. 

The reason it should be avoided at all costs is because it’s super high and will significantly eat into your earnings. The good news is that the only time you’ll run into it is when you hold an investment for less than a year. 

Any profits you make on investments you buy and then sell in under 12 months are taxed at the short-term capital gains tax rate. While it’s called something different than income tax, the percentage you pay is the same as the top tier of your marginal income tax rate. 

Unlike income tax, capital gains tax isn’t applied marginally. When you pay income tax, you’re charged different tax rates on different buckets of income. You start out by paying the lowest tax rate on the first bucket of income. In 2021, after deductions that’s 10% on the first $9,950 you earn. Then you pay the next tax rate (12%) on your second bucket of income ($9,951 to $40,525). And so on.

Since there are different buckets for income taxes, when you average the rates for all of the buckets you pay into, you end up with a lower tax rate than the top tier you’re taxed in. When it comes to short-term capital gains tax, all of it falls into your top tier, which means it’s even higher than your overall income tax rate. Like I said, it’s something you never hope to run into.

Below are some of the common ways investors run into short-term capital gains tax so you can try to avoid it.

  • Stock trading
  • Trading crypto
  • Flipping houses

Long-Term Capital Gains Tax

Unlike short-term capital gains tax, long-term capital gains tax is something you definitely want to run into. It is your BBF4L! It’s so incredible because the tax rates for long-term capital gains tax start at 0%! That’s right, folks. If you hold your investments for over a year, you pay 0% in taxes on your first $40,000 in profit! After that, you pay 15% on up to $441,450 of profits, and after that, all profits are taxed at 20%. 

Below are some of the ways you can take advantage of long-term capital gains taxes.

  • Value investing
  • Passive investing
  • Rental/investment properties
  • Holding crypto

So now you know how to avoid your ex, and keep your cool the next time the creepy guy comes up to say hi. Getting hit with your tax bill will never be fun, but as long as you stick with your BFF, short-term capital gains tax, as much as possible, you’ll pay significantly lower taxes on your investments.

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How to Start Investing In Real Estate Without Buying Property

Once you learn about the massive cash flow you can earn investing in real estate, you’ll become as obsessed with the idea of owning properties as little girls were with Justin Timberlake in the 90s. By owning just one multifamily, you can get other people to pay your mortgage and start living rent-free. If eliminating one of your biggest expenses sounds great, just wait until you get a few more properties under your belt. You’ll be living rent-free and have thousands of extra dollars flowing in every month. Sounds like living the dream!

But what this fairytale scenario leaves out is how hard it can be to get property number one. You have to save for a 3.5% down payment, which can be sky-high depending on where you live, and astronomical student loan debt can send your debt to income ratio through the roof and leave you with no loan options. 

If you’re stuck in this situation or the thought of dealing with tenants makes you want to pull a Gone Girl move, no worries. There’s a cheap and easy way you can become a real estate investor today without having to buy your own property. Allow me to introduce you to a REIT.

What is a REIT?

REIT is an acronym that stands for Real Estate Investment Trust. There are two types of REITs, Equity REITs, and Mortgage REITs, and they make money in completely different ways.

Equity REITs

Equity REITs are the most common and make money the same way you would with your own investment properties. They build, renovate, and operate properties that they lease out to tenants. You can think of them as the Jonathan Scott of the Property Brothers. They’re not afraid to get their hands dirty. 

Some equity REITs specialize in a specific market segment and only hold residential real estate, office buildings, or buildings in the healthcare industry. Each of these industries has its pros and cons, but as a whole, equity REITs generate the majority of their revenue from collecting rents.

Mortgage REITs

Mortgage REITs don’t make money operating investment properties but rather by lending money to the people who do operate them. They’re the Drew Scott of the Property Brothers. They handle the business side. 

Mortgage REITs make money from the interest they charge on the money they lend to real estate investors and from mortgage-backed securities. These are bundles of mortgages sold together as a single investment so companies can make money off of the mortgage interest.

How to Invest in a REIT

REITs are as easy to buy as stocks and are a great option for anyone who wants to become a real estate investor or add more income-generating assets to their portfolio. Both mortgage and equity REITs are required to pay 90% of their income to shareholders in the form of dividends, and if you own an equity REIT, you can also benefit from the property appreciation on the REIT’s holdings. This makes REITs a great income and growth option to add to your portfolio.

Adding a REIT to Your Portfolio

The simplest way to add a REIT into your investment mix is to create a 4 fund portfolio. This portfolio structure includes the following funds

  • Domestic Stock Fund
  • International Stock Fund
  • Domestic Bond Fund
  • REIT

To determine the asset allocation of your portfolio, start by deciding how much of it you want to allocate to bonds. Aggressive portfolios typically allocate 10-20%, and conservative portfolios allocate more. Once you know your bond fund allocation, then you can invest in the remaining funds at the following percentages

  • Domestic Stocks – 60%
  • International Stocks – 30%
  • REITs – 10%

To buy your investments, you’ll need to convert these percentages into the amount of your entire portfolio they’ll make up. For example, let’s say you decide to allocate 10% to bonds. First, take 100% minus your bond allocation of 10% to get the percentage of your portfolio that your other three funds will make up. In this example, 90%. Next, you’ll need to figure out how much of your portfolio the domestic stock fund will make up. To do that, multiply your portfolio balance of 90% by the 60% recommended allocation for this fund to get 54%. Then repeat this for the two remaining funds. The entire portfolio allocation for this example would be as follows

  • Bonds – 10%
  • Domestic Stocks – 54%
  • International Stocks – 27%
  • REIT – 9%

So now that you’ve been formally introduced to the JC Chasez of real estate investing, you can stop waiting around until you have enough money saved for a down payment or dreading the responsibility of managing tenants yourself. Just add a REIT to your portfolio instead and reap the rewards of a steady income and property appreciation while skipping the headache of dealing with noise complaints. 

Want to buy an investment property of your own? The book Hold will guide you through the entire process. From finding a realtor and accountant, to exact instructions on how to evaluate a property so you can start making money on day 1. It’s the book I’ve been using to start my real estate investing journey, and I can’t recommend it enough! Get it here!

*Disclosure: I get commissions for purchases made through some links in this post.

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WTF is Fintech? The Creation of the TikTok Investor and What’s Next

kim and kylie as bitcoin and ethereum

Bitcoin, NFTs, Robinhood, Coinbase. Besides constantly being in the headlines like Paris Hilton in the 2000s, what do all of these things have in common? They’re all new developments in the world of Fintech and are revolutionizing an industry. 

Financial Technology, or Fintech for short, has been taking the financial industry by storm, but what exactly is it, why is it so popular, and how will it change our lives in the future? Grab your popcorn. We’re going to answer that.

What is Fintech?

Fintech is used to describe any new technology that is intended to improve and automate financial services. This includes anything from backend software that’s used to make your experience with a company or product more seamless, to physical goods like the Square Reader that made it possible to accept credit card payments right to your phone. 

Many of the early innovations in fintech have evolved into things we now take for granted. Things like being able to deposit a check using our smartphone instead of having to go to the bank, opening a HYSA with an online bank like Citizen’s Access instead of going to a brick and mortar, or being able to download an investing app like Public and start trading immediately. We can now keep up with our finances the same way we keep up with the Kardashians, right from our smartphone.

Some of the newest innovations in fintech include crypto currencies, two of which, Bitcoin and Etherium, have become quite mainstream. As more companies like PayPal and Tesla start to offer Bitcoin payment options, these groundbreaking financial innovations will become more and more commonplace in the runnings of our daily lives. But since Bitcoin itself doesn’t actually have any tangible value, what is making these fintech innovations so popular?

Why is Fintech so Popular?

Since the turn of the 21st Century, fintech has been booming. 2019 was fintech’s biggest investment year on record with global investment reaching $168 billion, before dropping slightly in 2020. The US is the leader in fintech investment and makes up almost 80% of all dollars invested in the sector. So what’s driving US investors wild about fintech?

Convenience

The obvious first reason why Fintech companies are so popular with investors and with consumers like you and I, is because they make our lives easier. I had to actually go to the bank for something recently and was super annoyed that I couldn’t take care of what I needed to using my Chase app. Fintech has conditioned me to do all of my banking through my phone because it’s so much more convenient. While the convenience economy is ballooning as fast as Billie Eilish’s popularity, there is another more powerful force behind the rise of Fintech and that’s democratization.

Democratization

Traditionally, it has been difficult to invest in the stock market unless you were close to Kardashian level wealthy. There were high investment minimums, more fees, and no fractional shares trading. In fact, fractional shares trading didn’t become available until as recently as 2019! Without the ability to invest with smaller sums of money, pretty much everyone below the upper middle class was unable to build wealth through stock market investing. Then came the fintech revolution.

In the last few years, commission free trading apps like Public and Robinhood have been popping up like pimples before your period, which has made millennials and gen z flock to stock market investing. In a little over a year, we’ve seen TikTok become the default medium for investing advice, and watched young people use Reddit forums like WallStreetBets to “stick it to the man”. An entire new class of investor has been born. 

But investing isn’t the only area fintech has democratized. It’s also helping out entrepreneurs. Square’s phone plugin made it possible for small businesses to travel to any location and accept credit card payments, and crowdfunding websites like GoFundMe have allowed startups to skirt the traditional fundraising methods like venture capital and angel investing, and raise money in a new way. 

Without crowdfunding, many small businesses never would have been able to get a first meeting with a venture capital firm, let alone an investment. That’s because these investors are looking for the next billion dollar company, and one that can make it there fast. Crowdfunding websites help smaller businesses pitch their product to future customers, and raise money directly from their end users. This significantly increased the capital available to startups, and allowed more new businesses to enter the market.

The Future of Fintech

The latest disruptor in fintech is cryptocurrency. Bitcoin started the trend and revolutionized the way we store and transfer data through the development of blockchain technology. Think of Bitcoin as the Kim K of crypto. None of the other coins would be where they are without her. 

Then came Kylie, aka Ethereum. Ethereum changed the crypto game by introducing easy to use smart contracts. Before this, crypto consisted of fungible tokens, where one bitcoin is the same as another bitcoin. It’s just like a US dollar. If you exchange one dollar for another one, you can’t distinguish the difference. If you acquire more dollars, your balance increases, but you can’t differentiate any individual dollar from the others. 

Smart contracts added a new layer to this so non-fungible tokens, or NFTs, could be created. This meant you could create a completely unique element, sell it on the internet, and back it with a contract that was virtually unhackable. 

Currently, investors are using NFTs and crypto currencies as a store of value, similar to gold and tangible art. If you have too much money lying around, you can invest in digital art or crypto, and hope to combat the effect of inflation on your money while diversifying your portfolio. But since most of us don’t have an extra $69 million hanging around to spend on a Beeple NFT, the future for us peasants is in the application of smart contracts to the things we buy.

Smart contracts are the virtual paperwork behind one of a kind items, and normal people buy one of a kind items all of the time. Your house is a great example. It has its own address, features, amenities, problems, and good or bad, it’s unlike any other house in the world. The same is true of your car. 

The first way smart contracts can help everyday folks is by simplifying the buying process. All contracts can be signed securely on the blockchain network, and ownership can be easily transferred digitally. Again, like early fintech, making financial transactions more convenient.

The more revolutionary way smart contracts can be used in the future is by, you guessed it, democratizing the ownership of expensive assets. For example, let’s say that a developer wants to build a 300 unit apartment building in Miami. Traditionally, they could get some wealthy investors to give them money for the project, and would have their lawyers review contracts with their investor’s lawyers until they came to an agreement. 

With smart contracts, these agreements can be drawn up digitally, and once all conditions are met, ownership can be transferred. That means fewer attorneys involved, which opens the door for projects worth tens of millions or more to have hundreds or thousands of smaller investors instead of only a few larger ones.

Past the conceivable concepts of how smart contracts can be applied are all sorts of other ideas that seem completely out of this world. Will college students start selling their career in tokens to potential employers? Will hospitals start selling tokens to the public that offer varying levels of services? It’s impossible to understand or conceive of all of the ways blockchain technology and smart contracts will affect our future going forward, but I predict the innovations will have two features. They’ll create convenience, and promote democratization.

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Move Over WallStreetBets, There’s a New Way to Invest in Meme Stocks

Bee on pink flowers with the word buzz

Want to get in on the meme stock drama without having to monitor forums like WallStreetBets? Well, now there’s a way.

Introducing the BUZZ ETF. This ETF was created by investment firm VanEck and tracks the BUZZ Index, which uses artificial intelligence to select the 75 large-cap meme stocks that are generating the most “buzz” on social media. Hence how the ETF got its ticker symbol BUZZ.

If your FOMO is at an all-time high right now because you aren’t sure how you can get in early on the next popular stock, investing in this new ETF could offer you a solution. To help you decide whether the BUZZ ETF is a good addition to your portfolio, we’re going to break down what exactly a meme stock is, what criteria the BUZZ Index uses to select its holdings, and what the pros and cons of investing in this ETF are.  

What is a Meme Stock?

A meme stock is a stock that gets hyped up on social media, which causes an increase in the stock’s trading volume. Basically, people start hearing about the stock on platforms like Twitter and Reddit, so they go and buy it. The sudden hype and subsequent market transactions cause the stock’s price to go up, often to well above market value. 

How the BUZZ Index Selects Stocks

The index uses AI to search social sites, blogs, and other platforms and find the companies generating the most discussion on the web. It then looks for which companies in that dialogue have the most positive and bullish social sentiment. During these searches, the algorithm doesn’t only focus on talk of the company’s stock, business dealings, or financials but looks at everything from how people feel about a recent ad, to the reviews people are giving on a new product. It then forms an index of the top 75 scoring companies with a market cap of $5 billion+.

The index’s list of holdings is reviewed every month and updated as necessary. However, to cut down on transaction costs, if a company ranks in the top 75 one month and then moves slightly outside of this range the next month, say to 80th place, the algorithm will keep the company in the index and review it again in the next period.

Because of the month-long wait period between evaluations, the creators of the BUZZ Index say that short-term blips in stock prices, like we saw with GameStop, won’t affect the index. GameStop isn’t part of the fund’s holdings, mostly because its market cap was well below the $5 billion threshold when the short squeeze happened, but also because of how short-term its popularity was. Stocks that are extremely volatile for a very short period will most likely not make it into the index.

Should You Invest in the BUZZ ETF?

Pros

  • Young people are increasingly using social media platforms, blogs, and other alternate sources for information over more well-established news outlets. Platforms like Twitter, TikTok, and Reddit now have real power in shifting a company’s public perception and influencing the price of its stock. Since those sources are having a tangible effect on stock prices but aren’t considered in the traditional evaluation process for index holdings, investors in this ETF could see gains from information that would have been missed during a typical evaluation of a company’s financial statements.
  • Social media is playing an increasingly large role in a company’s marketing strategy. Companies that utilize social media well could have the upper hand against their competitors in terms of revenue growth. This index should pick up on the companies with good social media strategies, and investors could see better long-term results from the predictions the algorithm makes based on social media chatter.
  • By focusing on more stable, large-cap companies, the index reduces the risk a typical meme stock investor faces. Most of the companies we’ve seen pop up in the WallStreetBets saga would have been screened out by the index for having a market cap below the $5 billion threshold. They also only experienced brief peaks in their stock prices before they plummeted back to more normal levels. Based on this fund’s criteria, short-term fads like this most likely won’t impact BUZZ investors’ portfolios. 

Cons

  • While there is a month-long waiting period between evaluations to screen out super fast fads, there’s still a high potential for frequent fluctuations in the fund’s holdings, which isn’t ideal for the long-term investors who usually buy ETFs. If the index’s holdings fluctuate dramatically, investors may not be able to capture any real growth and will instead just be stuck holding that month’s most popular overvalued companies. 
  • Consumer sentiment doesn’t equal sound financials. At the end of the day, investing is about making money. It doesn’t matter how much you cheer a company on. If they don’t have a solid financial foundation something like the coronavirus can come along and knock them down, leaving you with little money.
  • Basing the fund’s holdings off of hype, which often inflates a company’s stock price, means that you could just end up paying more for the shares you’re buying than they’re worth. It’s like walking into a store and seeing shoes for $100 and offering the cashier $150 for them. You’d never do that with shoes, and you shouldn’t do that with stocks either. 
  • None of the behind-the-scenes companies will make it into the index because consumers don’t know their names and therefore won’t be hyping them up on social media. A good example of this is Tennant, the company I used to work for. They make industrial floor cleaners that I now notice everywhere. At airports, Home Depots, even at a train station in Italy. Large companies like this that are responsible for the inner workings of the brands we know will be missed by this index.
  • This has been done before. There was another social sentiment ETF that started in 2016 and ended after just 3 years. 
  • The expense ratio is relatively high at .75%.

The Verdict

If you aren’t super concerned about what’s been happening with GameStop, AMC, and Nokia, I say skip the BUZZ ETF. The expense ratio is fairly high, and the last attempt at an ETF like this didn’t work out. If you’re getting FOMO and think investing in this ETF could help you capture some earnings from meme stocks, try it out. Only time will tell how this ETF will perform, and since it just launched in March of 2021, we’ll have to wait to see how it all plays out. 

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Meet the S&P 1500, The S&P 500’s Bigger Sister

mean girls representing the s&p 1500 made up of the s&p 500 s&p 400 and s&p 600.

The S&P 500 is like the most popular girl in school. Everyone knows her name and the details of her life, even if they don’t know her personally. And while everyone has been hyper-focused on what she’s doing, they’ve completely missed out on getting to know her big sister, the S&P 1500.

She may be flying under the radar, but the S&P 1500 has all of the great qualities her more popular sister does, and then some. To help you get to know her better, here are all of the details on who the S&P 1500 is and whether you should invest in her or the S&P 500.

Who Is the S&P 1500 Index?

The S&P 1500 is an index that tracks the famous S&P 500, as well as the S&P 400 and S&P 600. Haven’t heard of the S&P 400 or 600 either? Not surprising, but they all have something in common. Like the 500, they’re indices that track the performance of several hundred US companies. What sets them apart is the size, or market cap, of the companies they track.

Market capitalization, or market cap for short, is the total value of all outstanding shares of stock in a company. For example, if a company has 100,000 shares of stock trading at $50 per share, the company’s total market cap is $5,000,000 (100,000 shares x $50).

Each of the S&P indices tracks a different sector of the market based on market cap. The S&P 500 index only tracks large-cap companies, some of which are the most high-profile companies in the US. 

An investor needs to know the market cap of any funds or companies they invest in because a company’s size impacts how risky it is. In general, large-cap companies are the least risky because they are better established and tend to be market leaders in their industry. The risk of them going bankrupt is much smaller than it is for a small-cap company that is in an emerging and unpredictable industry and has only been in business for a few years. 

Think Coke vs a CBD company. Coke has solidified its place in the beverage space and is the market leader in its industry, making it unlikely to go defunct in the next 20 to 30 years. On the other hand, while CBD is extremely popular right now, it’s a relatively new product and has a much higher probability of fading away over the next few decades. If that happens, CBD companies will be nonexistent. 

To help you understand the difference between the S&P 500, 400, and 600, here is a breakdown of the market cap and risk level of each index.

The S&P 500

  • Large-Cap
  • Typical market cap above $10 billion
  • Risk – Lowest

The S&P 400

  • Mid-Cap
  • Typical market cap between $2-10 billion
  • Risk – Medium

The S&P 600

  • Small-Cap
  • Typical market cap under $2 billion
  • Risk – Highest

Should You Invest in the S&P 500 or the S&P 1500?

One of the number one rules of finance is the greater the risk, the greater the expected or required reward. In layman’s terms, that means the riskier something is, the more money you can expect to make from it. Unfortunately, with a larger upside also comes a higher possibility of losing money.

Since the S&P 1500 contains small and mid-cap companies, it is a riskier investment than the S&P 500, again because the 500 only contains large-cap companies which are less likely to fail. While your odds of losing money are lower, that also means that if a smaller company in the S&P 400 or 600 breaks out, you’ll miss out on the earnings from its above-average performance.

The bump you get in overall market coverage by investing in the S&P 1500 vs the S&P 500 may seem small at only a 10% increase, but that’s nothing to scoff at. Buying the S&P 1500 means you’re investing in 90% of the entire value of the US stock market vs only investing in 80% of the market with the S&P 500. And remember that those smaller companies now could turn into the next Google or Facebook.

My Overall Assessment

If you can handle the added risk, invest in the S&P 1500. If you’re really risky, invest more heavily in the S&P 400 and 600, which have both historically outperformed the S&P 500 and 1500. If all of this talk about risk makes you anxious, stick to the popular sister you already know, the S&P 500. 

*full disclosure: I am invested in an S&P 1500 ETF.

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How to Get Over Your Fear of Investing

The stock market is a chaotic place. One day the market is hitting a new high, and the next, it’s in freefall. These constant ups and downs can make investing seem like that toxic relationship you had in high school you promised yourself you’d never repeat.

Sure, you had some great times, but the breakup was terrible! What if investing is the same way, and when you finally decide to call it quits, you have to cash out your investments when the markets down? Think about how quickly all of that money you worked so hard for that would vanish! Then what will you do? Sell your possessions, move in with friends or family, kiss the possibility of retiring goodbye, and find a job you think you can tolerate until the day you die? Talk about a nightmare. 

If you’re scared of investing, you’ve probably played a scenario like this out in your head. But I have a question for you. Do you actually know anyone who lost all of their money investing in the stock market?

My guess is you don’t. And if virtually none of us know someone that lost it all investing in stocks, why are we so fearful of it? I’m going to answer that question by breaking down the psychology behind why stock market investing is so intimidating, tell you how to overcome your fear, and fill you in on the investing strategy that makes it almost impossible for you to lose money.

Why You’re Scared of Investing

The reason you’re so fearful of investing is because of a concept called loss aversion. This is when people do more to avoid a potential loss than they would do to acquire a potential gain. The reason we do this is because losses feel considerably worse to us than gains.

Imagine if your boss sat you down and gave you one compliment and one criticism. You would probably fixate more on the criticism than the compliment. If one person leaves you a positive comment on Instagram, and another person leaves you a negative one, you’ll probably feel more strongly about the negative comment than the positive one. It’s not that we don’t enjoy the positive part, it’s just that we dislike the negative part more. The same is true for money.

Take the popularity of the debt freedom movement, for example. People absolutely HATE the idea of “losing money” to interest, so they throw massive amounts of money toward their debt to pay it off asap. But how much does this actually save you?

Let’s say you take out a loan for a $250,000 house at a 3.5% interest rate for 30 years. If you pay an additional $1,000/month on your loan, you save almost $100,000 in interest and shorten your loan by 17 years! That’s an incredible savings, but what would have happened if you had invested that extra $1,000 instead?

Assuming you’ll receive the average return of 10% per year, investing $1,000/month in the S&P 500 for 13 years (the same amount of time it would have taken you to pay off your mortgage), would earn you almost $300,000! And since your extra $1,000 isn’t going toward your mortgage, it’ll take you the full 30 years to pay it off. While that sucks, the good news is that if you keep investing your extra $1,000 over those 30 years, you’ll earn over $1.9 MILLION!

So it’s a no-brainer. You’d take the $1.9 million in earnings over a savings of $100,000, right? Many people don’t. Even though they know they can earn 19X more money by investing, many people still choose to pay off their debt rather than invest. Why? Because of loss aversion and certainty.

You know with 100% certainty that if you pay an extra $1,000 toward your loan, you will pay it off early, and you will save money on interest. Investing is more abstract. While highly probable, the massive gains from investing are not certain. The fact that there is a possibility, however small, that you could lose money investing holds people back.

Now that you can see the massive potential investing has, how do you overcome your fear and start doing it?

Start Small

If you think you need to have thousands of dollars saved before you can start investing, that couldn’t be further from the truth. You can start off investing $5 or by contributing 1% to your 401k. These ultra-low investment minimums have been made possible by the popularity of fractional shares.

What Are Fractional Shares?

Fractional shares are exactly what they sound like. They’re a fraction of a share of stock. Back in the old days, you could only buy an entire share of a company’s stock. This made buying stock in many large, well-known companies difficult for early investors because of their high share prices. 

Here are some of the current (by current, I mean the day I wrote this post) share prices for some popular companies.

  • Tesla – $670
  • Chipotle – $1.444
  • Google – $2,030
  • Amazon – $3,110
  • Berkshire Hathaway (Warren Buffett’s company) – $380,402

No, that isn’t a typo. To buy 1 share of Berkshire Hathaway costs almost $400,000! Few people have that kind of money to invest when they’re starting out, and that’s where fractional shares come in handy. If you only have $100 to invest, you can still invest in the companies listed above by buying the following fractions of a share.

  • Tesla – 3/20
  • Chipotle – 7/100
  • Google – 1/20
  • Amazon – 3/100
  • Berkshire Hathaway – 3/10,000

Being able to buy fractional shares means you don’t need to save up thousands of dollars and then get anxious about putting a large lump sum of money into the market at once. Instead, you can invest small amounts of money at regular intervals, an investing method called dollar-cost averaging.

What Is Dollar-Cost Averaging?

Dollar-cost averaging is an investment strategy where an investor divides up the total amount they’re going to invest into multiple smaller purchases. The goal is to reduce the potential losses you could face if the market drops immediately after you invest a large sum of money. Here’s an example.

Let’s say you want to invest $10,000 this year. If you invest all of it today, and the market drops tomorrow, you’ll lose money on all $10,000. But, if instead, you use dollar-cost averaging and invest $833/month, you’ll only experience losses on the money you’ve invested up to that date. If it’s June, for example, you’ll have invested $5,000 of your $10,000, so only $5,000 will be negatively affected.

Even better is that when the market drops, shares of stock become cheaper. So now, when you invest your $833 next month, you’ll be able to buy more shares with the same amount of money. Later, when the market goes up, you’ll be able to recover your losses and make money on the shares you purchased at the lower price. 

Another perk of dollar-cost averaging is that you can automate your stock buys, so you don’t have to constantly work to make investing a priority. Instead, you just set up automatic purchases, and everything happens behind the scenes. You don’t have to lift a finger.

To do this, open an investment account if you don’t already have one, select the amount you’re comfortable contributing, and determine how often you’ll make your contributions. Remember, $5/month is better than $0/month. You can always increase your contributions later as your comfort level increases. You’ve got a while to get comfortable, which brings me to my last point.

Invest for the Long Term

Long-term investing isn’t glamorous or thrilling like the investing you see in the movies or on the news, but it is a surefire way to make lots of money. According to a study by NerdWallet, a 25-year-old that invests 15% of their income into the S&P 500 for 40 years, has over a 99% chance of maintaining their initial investment. That means it’s almost guaranteed that you’ll at least get your money back. But the study went a little further.

It also showed that there’s a 95% chance that you’ll earn nearly 3X your initial investment! While this is just a simulation, if you look at the returns of the S&P 500 since its inception, you can see that they’ve gone waaaaay up.

If you had invested $100 in the S&P 500 in 1957, you would have over $50,000 today. That’s an incredible amount of money to make from such a small investment. So how can you do this?

Invest in a Diversified Fund

The key to great performance over the long term is investing in a diversified fund like an index fund, mutual fund, or ETF. Funds that track the S&P 500 are a great example of this. They hold all 500 companies that the S&P 500 index tracks, and when you buy one of these funds, you’re actually buying a fraction of a share of all 500 companies. 

Remember the saying, “don’t put all of your eggs in one basket?” Well in investing terms, this can be translated to, “don’t put all of your money into one company.” If you do, and that company fails, you’ll lose all of your money. If instead, you invest in an S&P 500 index fund and own 500 different companies, if one fails, you still have 499 more that you can make money from.

Investing in so many different companies reduces your risk because your chances of losing money decrease dramatically. If the thought of losing money in the stock market is holding you back, investing in a diversified fund is the way to go.

Hold Your Investments for Decades

The second thing you need to do is to hold your investments for decades. In the NerdWallet simulation, the investors held their S&P 500 shares for 40 years, and in our debt vs investing example, the investor held their shares for 30 years. Once you buy the diversified fund, you need to let it do its thing for a long time before you can earn a substantial income.

Take a look back at the S&P 500 graph from earlier. You see how the line is almost flat before it jumps dramatically up? This is due to compounding, which provides exponential growth. You have to wait out the slow period to reap huge gains later on. After decades of investing, the extreme growth in your investments will make it near impossible to lose it all.

So while it’s totally normal to be anxious about investing in the stock market and want to avoid it, it’s also irrational. Even though there are peaks and valleys, it’s basically a guarantee that you’ll make money, and a lot of it, if you invest in the stock market. You just need to stick to investing in diversified funds, automate your investments, and let them grow for decades.