“Do you play the stock market?”
Then the conversation shifted to how the stock market is similar to gambling.
Around the same time, I saw this tweet by Emmet Savage
“Stock investing is the undisputed wealth creation machine for everyone. Here’s why:
- You don’t need much $ to start
- You don’t need to borrow money
- You don’t need an expensive education
- With a handful of replicable rules success is a mathematical certainty”
If you have been reading my blog, you already know the answer to the first question. I don’t “play” the stock market. I am a buy-and-hold investor and my goal is to invest for the long-term (minimum of 3 years, ideally longer). In this article, I want to talk about this tweet and why I agree with all these reasons.
I also want to talk about my reasoning why the stock market is not a place to play or gamble, rather it is a place to build long-term wealth. For me, investing is not a game and the purpose of investing is not to minimize boredom, rather I am looking to achieve financial independence. Let’s start with the first line of the above tweet.
Stock investing is the undisputed wealth creation machine for everyone.
To understand this statement, let’s look at this table. I think the numbers speak for themselves but let’s look closely for a few lessons
- If you invested in any year between 1871 and 2014 and held for 15 years, how many times would you have lost money? – Hint: The answer is 0. Does that sound like gambling to you?
- As your time horizon increases, the probability of positive returns on your investments also increases.
- Over a period of 143 years, the average annual returns are 11.3% for 30-year holding periods with zero chances of being negative.
- Can you think of any other investments that rival these returns over such a long period of time? I have looked at real-estate, gold, silver, oil, minerals but stock market investments win every time.
Let’s look at the second statement in the tweet.
You don’t need much $ to start
In a previous article, I showed that by investing $600 per month (10% of their salary), anyone can get to a large sum of money over a period of time and reach financial independence. In fact, there is no minimum amount to start investing these days. With $0 commissions and fractional shares, you can start investing by putting as low as $20-$50 per month.
Let’s look at the next two statements in the tweet.
You don’t need to borrow money
You don’t need an expensive education
These are important lessons because if you are borrowing money to invest, you may not be able to achieve these results. When you decide to invest in stock markets, you should only invest that money that you do not need in the next 12 months if you are working. On the other hand, if you are retired, you should only invest that money that you do not need in the next 3-5 years.
You don’t need a MBA or another fancy degree to invest. This is one of the biggest lessons for me. Anyone can invest and achieve these results or maybe do better. You don’t have to have any formal training in stock markets and you don’t need to study any investment models to generate market returns. This is no fluke either. You can do it consistently and cheaply by investing in index funds. You just need to follow a set of rules and that brings us to the last part of the tweet.
With a handful of replicable rules success is a mathematical certainty.
I don’t know what rules Emmet had in his mind when he wrote this tweet but I have created my own rules from years of reading and following people which I will list below. I call these rules “my path to financial independence”. Let’s look at these rules:
- To invest, you must save first because if you do not have an emergency fund, you are likely to sell at the bottom of the market due to panic.
- Track Expenses using a budget. There are some paid apps to do that but I like free things so I created my own budget using a spreadsheet. Follow the 50-30-20 rule ( 50% of your budget for needs, 30% for wants and 20% for savings).
- As I mentioned previously, any money that you need in the next 12 months should not be in the stock market. The reason for this is it takes about 12-18 months to recover from a recession so you want to have a cash cushion so that you are not forced to sell at the bottom of a recession.
- Make sure you are investing in your 401K plans to get advantage of your employer’s match (This is FREE money!)
- Contribute to a Roth IRA. You and your spouse can contribute $6,000 each ($7,000 if you are 50 or above) per year.
- Max out HSA contributions. This is the best retirement account.
- Diversify. In general, it is not a good idea to start investing by putting money directly in individual stocks. You want to start by investing in index funds. Build a sizable sum in this portfolio. Once you have a core foundation, you can start buying individual companies. Aim to get at least 10 different positions as soon as possible. Don’t aim for short-term gains and don’t get scared by volatility. I have created a course that goes over this process and have received great feedback from those who bought it.
Once you have these things taken care of, you should be able to start investing with the money that you are saving each month (ideally about 20% of your budget). Have a set amount each month or after each paycheck that you are going to invest on a set date (randomly). You can invest in low-cost index funds that allow you to invest in the entire stock market or you can invest in an ETF that allows you to invest in a particular industry or you can invest in individual stocks.
Following these rules will give you a sense of calm and you will not be afraid when you see your investments fall by 10, 20 or 30% within a span of a few days or months like it happened in Feb-Mar 2020 due to COVID. In fact, you will look forward to these declines so that you can add to your favorite holdings. On the other hand, if you do not have an emergency fund or you invested your savings in the stock market that you need in the next year, you are more likely to sell at the bottom because you got scared and then you will never invest in the stock market again. Not only that but you will compare the stock market to a casino and call it gambling.
Following any one or a combination of these alternatives (index funds, ETFs, or individual stocks) can give you a return of about 10% return annually. People say investing in the stock market is risky. I say not investing in the stock market is risky. For example, in this scenario, if James did not invest in the stock market but rather left all his money in a savings account earning about 0.5% every year, he would have had a gain of $1,075 at the age of 55 instead of a gain of $1,550,330.
So, what do you think? Do you “play” the stock market? Is investing in the stock market akin to gambling? Or a wealth-building machine? Feel free to comment below.