Investing in stocks is one of the most important financial skills you need to master. On average, stocks have given an annualized return of around 10%. At that rate, your money doubles every 7.2 years.
Let’s say you start with $10,000. After a 40 year career, that turns into at least $320K from doubling 5 times. That’s from a single $10,000 investment.
I’m going to level with you. You can’t get rich off just your salary. Savings and bonds won’t do it either, the return isn’t high enough to make an impact during your lifetime.
Stocks are the key.
No matter your income, you will get rich off stocks as long as you start investing early, keep investing, and never sell.
Anyone can do this. You don’t need to be a financial wiz, have insider access, or a ton of time. I spend a few hours per YEAR managing my portfolio. Time and consistent contributions will make you a millionaire.
That’s why I have compiled a list of easy things you can start doing from today to make money in stocks.
Let’s get right into it.
The stock market is not sexy
The quicker you realize that the stock market is not sexy, the faster you will start making money from it. For 99.9% of people, investing in stocks is nothing like what you saw in The Wolf of Wall Street. It’s also not listening to the so-called “financial experts” on news channels and buying their hottest stocks of the season.
All of that is noise. It won’t help you make money in stocks. Successful stock market investing is all about being patient and staying in the market for many years.
Which brings me to…
Stay invested in the stock market
It’s very easy to panic and sell stocks whenever there’s a big drop in the stock market. However, selling your stocks at the slightest fall or when they are down could be the worst financial decision you can make.
When the markets fall, everyone is talking about the next recession or how things are only going to get worse. I get it. Downtrends are scary. But remember that they appear worse than they actually are because of how much they are discussed and analyzed.
When you are panicking, first of all, take a deep breath.
Since 1900, we’ve seen some real disasters there have been many reasons for the market to fall and not rise:
- The Great Depression
- World War 1 and World War 2
- Cold War
- 9/11 Terror Attacks
- Asian Financial Crisis
- Dot-com Bubble
- The 2008 Recession
Through all this, markets have continued to grow at about 10% per year.
Here’s another fascinating stat that I love. In the months following a 10% drop since 1900, this is how much the markets have risen in the immediate future on an average:
- 1 Month: -0.1%
- 3 Months: 7.5%
- 6 Months: 11.1%
- 12 Months: 14.6%
What does this tell you?
The stock market has ALWAYS gone up every time it has fallen. So, don’t panic when it goes down. Trust how stock prices have always behaved. In fact, when they fall, try to buy more stocks.
Stop timing the market
My oh my, I have heard about people trying to time the stock market so many times.
- “I’m just waiting for the next dip before buying in.”
- “I wouldn’t invest right now because the stock market is too expensive.”
- “I sold my stocks because the markets made an all-time high.”
Everyone is trying to buy low and sell high. Even Financial advisors are always trying to time the market.
Being able to consistently identify highs and lows is a very difficult skill. Even the people who have spent all their lives trying to master it are not successful at it. It’s impossible to do consistently.
Guess what the most likely outcome is when the stock market hits a new high? More highs! By waiting, you miss out on more gains.
Same thing happens when times are bad. The biggest gains come after the biggest drops. If you try to wait for the market to be “all-clear,” you’ll miss out on them. And you won’t get anywhere close to that 10% annual return.
Here’s something that very few people know about the stock market.
A study in 2020 released findings that will blow your mind. It found that if you were not invested in the market for the 10 best days (the days when the market rose the most) of the stock market between 2004 and 2019, your returns would have dropped by an astounding amount. For example, here’s how a $10,000 investment would have grown in that period if you had:
- Stayed invested all days: $36,418 at 9% annualized return
- Missed the 10 best days: $18,359 at 4.15% annualized return
- Missed the 20 best days: $11,908 at 1.17% annualized return
- Missed the 30 best days: $8,150 at -1.35% annualized return
- Missed the 40 best days: $5,847 at -3.51% annualized return
Missing just the 10 best days cuts your returns by more than half. If you missed the top 20, you are just about breaking even (in fact, you are losing money because of inflation).
Trying to time the market can be DEVASTATING. Ignore the news and invest every month like clockwork. That’s how you make the most money.
The best way to invest in stocks
They are the best way to make money in stocks. Index funds put their money in indexes like the S&P 500 or the Russel 1000. Index funds are passive, their fund managers don’t keep buying and selling stocks to “beat the market”. In fact, their objective is to be the market.
A lot of research has shown that active fund managers fail miserably while trying to beat the market. In fact, more than 90% of actively managed funds fail to beat the index. So the index fund approach ends up earning a better return. They also have less risk since you’re exposed to the entire market. If some random company implodes and the stock goes to $0, it doesn’t matter.
They’re also a lot easier to run, so the fees are lower. The taxes are lower too since the fund managers aren’t buying and selling all the time.
Index funds really are a free lunch:
- Lowest costs
- Better returns
- Lower taxes
- No effort
- Less risk
You can also diversify easily through index funds. By nature, they help in diversification, but you can go a step further. You can pick a few index funds across US stocks, international stocks, and bonds. A lazy portfolio like this gives you lots of upside and low amounts of risk that’s super easy to manage.
I recommend making at least 90% of your portfolio through index funds.
How to pick individual stocks
I understand you will have the itch to buy individual stocks.
But I am not going to sugarcoat it. Buying stocks is brutally hard.
The odds of successfully picking individual stocks are very low.
From 1926 to 2015, there have been 25,782 distinct stocks.
During these 90 years, the stock market rose $32 Trillion in value. Half of the gains came from JUST the top 86 companies. 86 out of 25,728! The remaining wealth was generated by the top 1000 stocks. That’s only 4% of all the companies.
The odds of success by buying individual stocks are very slim. Just 4%.
That’s why I recommend using only the remaining 10% of your investment capital to buy individual stocks.
I pick a few stocks myself but I keep it well below 10%. I get to scratch the stock-picking itch, eat plenty of humble pie, and then get back to my day.
Have fun with 10% of your portfolio, just don’t go beyond that. Keep the other 90% really boring. You’ll make a lot more money.
Automate your investments
I’m a huge fan of automating investments. Go into your investment accounts and set a specific amount to get transferred automatically every month
Automating achieves three purposes.
First, you are not trying to time the market. Investing each month allows you to average out the gains and losses. It also makes for smoother returns. When you invest each month, if the market is high, your portfolio still grows. If the market is low, you are buying stocks at a comparatively lower price which will eventually go up.
Second, you don’t forget to actually invest. By setting up automatic investments, you are truly embracing the “set it and forget it” strategy. You’re not relying on yourself to invest. We all forget to do things. With investing, forgetting to invest will rob you of more returns than any recession will. Don’t rely on willpower or your memory, get it automated so you never have to worry about it again.
Third, you can spend freely on the rest. By setting up an automatic transfer to trigger right after you get paid, it never feels like you had the money in the first place. Set up transfers for your investments and savings, set aside enough money for major bills like rent or a mortgage, then spend the rest freely until next month. You’ve done the hard work of taking care of your future by setting up the automatic investment, now go enjoy yourself by living your rich life. Automatic investments allow you to enjoy the present while securing your future. You can have it all.
The first step in making money through stocks
Armed with this new knowledge, you are in a great position to make money in stocks.