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You are never going to reach your goal of building wealth if you don’t have an investment strategy!
There are many different strategies to choose from. Some choose to invest in real estate, some choose the stock market, and others just keep their money in a savings account.
Whatever you choose, you need to have investments to meet your financial goals of building wealth.
Today, I’m going to explain to you why stocks are great long-term investments. As a bonus, I’ll also show you how you can start investing in them.
Ready? Let’s dive in!
Why are stocks good long-term investments?
Investing in stocks is one of the greatest investments for long-term growth. If you have a horizon of 10 years or more, putting your capital in stocks is a great option.
Saving your money in the bank is not enough because the interest rate that banks offer is too low. Although you may try to budget and save money, keeping your money in the bank would risk your retirement.
You’d barely be able to keep up with inflation.
Let me explain why investing in stocks is great for the long term.
It’s a simple set-and-forget strategy
Once you pick your stocks and funds, it’s a set-and-forget strategy.
Unless your risk tolerance changes, all you have to do is buy-in and forget about it!
Keep in mind, the important thing is to stay invested. You don’t want to sell your stocks just because the price of your stocks falls.
When you buy stocks, you’re buying companies. As the companies continue to experience growth and generate income, your portfolio will grow as well.
Stocks tend to outperform other low-yielding assets
Throughout the past century, the stock market has averaged a 10% annual return. This rate of return is much higher than other assets such as bonds and certificates of deposits.
For example, the average 12-month CD rate today has an average of 3-4%, and a U.S. total bond fund has an average of around 2%.
You will experience more growth by investing your capital into stocks compared to other low-yielding assets.
Gain the pride of ownership
Being an investor in a company is something you could be proud of.
When you buy shares of a stock, you are buying a portion of a company. As the company continues to experience growth, the price of your stock will increase and the capital you have invested in the company will grow as well.
A lot of companies also pay a dividend to thank their investors for investing in them. If you reinvest the dividend you receive, it will create a compounding effect that will provide you with multiplying gains in the future.
Protect yourself from inflation
From the 1960s until today, inflation has averaged about 3.8% per year. Something that cost $100 in 1960 would cost $929.57 in 2021!
Stashing your savings in the bank would not cut it.
It may work for a short-term goal, but you need an investment strategy for long-term growth.
Invest your money in the market and protect yourself from future inflation.
You can do everything from the comfort of your home
The internet has added so much value to our lives.
Before the internet, you had to call your broker to buy stocks and to maintain your investment. You also had to pay a fee every time you placed a buy or sell order.
Now, you can save so much time and money by doing everything online. Buying and selling stocks cost nothing, as many U.S. brokerages have eliminated their fees.
Stocks are also a much more stay-at-home investment compared to real estate. Generally, with real estate, you would have to leave your home and scout for potential places of interest. Once you find a place, if you can’t afford to pay in cash, you’d have to go to different banks to find out which place would offer the best loan for a down payment.
With stocks, everything can be done at home! No going out and about and no calls at 3 am from a tenant saying the toilet doesn’t work.
7 steps to start investing in stocks for the long term
Have you decided to invest in stocks for your long-term financial goals?
I’ll walk you through the steps on how to get started!
Assess your financial risk
Before you start investing in stocks, you need to assess your current financial situation to determine how much risk you can take.
Save Money
For example, are you living paycheck to paycheck? If you are, then you cannot afford to risk your money in investments. You first need to figure out how to save more money or increase your income.
If you’re struggling to save money, try creating some savings goals. You can aim to save a certain amount of money each month and place it into a separate savings account. Maybe you can eat out less or drive a cheaper car.
Try even saving the funds you receive from a cash-back credit card. You can easily find a credit card with a cash-back rate of at least 2% with no annual fee. That translates to getting a 2% discount on all your purchases. It may sound like a little, but it adds up.
Create a budget plan and stick to it. The savings will add up over time.
Get Rid of Debt
Make sure you are taking into account any debt you have. If the debt has a high interest rate, you want to prioritize paying it off. It may seem difficult, but payment after payment, you will slowly begin to get rid of those pesky debts.
Have an emergency fund in a savings account before you start investing
If you have some spare money left over at the end of every month, do you have an emergency fund? If not, you need to start building an emergency fund that’ll cover at least 3-6 months’ worth of living expenses.
Everyone needs an emergency fund because you never know what may happen in the future. Things happen such as your car breaking down, or maybe an emergency visit to the doctor’s office. What if you lose your job? You never know.
Start saving for an emergency fund until you can cover expenses for up to a six-month period without having a job.
Start investing early
Investing for the long term takes time.
Let me give you a couple of examples.
Let’s say you want to retire at 60 with a million bucks.
If you were to start investing at the age of 25, you would only need $221 each month to reach your goal.
However, if you waited until you were 35, you would have to invest $755 to have a million dollars at retirement.
The earlier you start, the better off you’ll be at retirement. The longer the time horizon you have, the more you can allow the compound effect to play its role in your investment. Compounding has a multiplier effect that will greatly contribute to building wealth.
Choose a brokerage account
You need a brokerage account to buy the stock that you want. A broker is like a middleman between you and the stock market. You tell the brokerage what stock you want to buy and sell, and they execute it for you.
There are tons of brokerages to choose from. The biggest ones out there are Vanguard, Schwab, and Fidelity. Choose either one of these three and you will do just fine.
There are also newer brokerages like M1 Finance that have some cool features you could benefit from. Once you set an asset allocation and choose which companies you want to invest in, it automatically buys the things you choose every time you deposit money.
Choose which account type to open
Before you get started, you need to choose which type of account you want to open.
Individual brokerage accounts are for general investing purposes.
Roth IRAs and HSAs are accounts that shelter your investment from taxes.
You can even open a joint account to keep your investment together with your spouse.
If you’re not sure which account type to choose, I would just go with the individual brokerage. You can always open or close additional accounts later on.
Choose your investments
After you create an account, you can now start the fun part – choosing your investments.
Are there any brands you truly believe will continue to grow for a long period of time? Maybe you believe in Tesla and you like Elon Musk. You can buy a stock of Tesla and become a partial owner of the company.
One share of Tesla is currently trading at around $200. What do you do if you don’t have enough money to pay for one share? You can always buy fractional shares. Brokerages like Fidelity and M1 Finance offer fractional shares, which means you can buy stock in any company for as little as $1.
One thing I would like to recommend is to stay away from actively managed mutual funds. These types of funds are notoriously known to underperform the market. Not only that, but they also charge a hefty price, otherwise known as an expense ratio, to invest in the fund. The higher the expense ratio, the less money you will be left with.
Stay away from mutual funds!
So, what should you invest in? At InvestaMind, I teach all about index funds. Index funds are a low-cost way to gain diversified exposure to the whole market.
Not only that, but the performance of index funds usually exceeds mutual funds in the long term.
For example, if you wanted to gain exposure to the top 500 companies in the United States, you could simply buy an S&P 500 index fund.
The Three-fund Portfolio
If you’re not sure how to structure your investment, you could use the three-fund portfolio. Inspired by Jack Bogle founder of Vanguard, it’s the simplest way to gain diversified exposure across multiple different markets.
As the name implies, the three-fund portfolio only consists of the following:
- One domestic index fund
- One international index fund
- One U.S. total bond market index fund
Learn about how much you should allocate to bonds.
Don’t underestimate the amount of value that these three simple funds can have. Not only is it diversified across the entire world, but it’s also one of the most tax efficient.
Asset Allocation
There is no set rule as to how much money you should allocate to each fund.
If you want to lean heavier towards domestic equity, you could do 70% domestic, 20% international, and 10% bonds.
If you want to distribute your capital more equally without the bonds, you could have 65% domestic, and 35% international.
It’s up to you. However, keep in mind you don’t want to go too heavy in either fund. Stay somewhat balanced and diversified.
Stay the course and ignore price fluctuations to achieve your financial goals
Now that you finally got your investment allocation set, all you have left to do is to keep investing and stay the course.
A good investor never deviates from his/her plan.
Ignore The News and Predictions
No one knows what the market is going to do. Not me, not you, not anyone on this planet can consistently and accurately make predictions.
Examples of Failed Predictions
Let me give you a few examples.
“Dow 30,000 by 2008: Why It’s Different This Time,” is a book written by Robert Zuccaro that predicts the Dow Jones would reach 30,000 by 2008. This book is a compilation of several decades worth research and hard work. However, the Dow did not hit 30,000 until 2021.
Back in 2003, a guy named Paul La Monica, editor and writer at CNN Money, claimed that Netflix would fail. He stated there was no way Netflix would be able to outgrow DVD rental services. Back then, Netflix was only trading for $10 a share, but the stock reached a high of over $600 a share.
Why do people on the media say such foolish things?
The media needs views to generate money. Generally, everything in the media is exaggerated to get more views.
The media is not made up of professional wizards that can predict the market. Ignore them and stick with your initial plan.
Ignore Price Fluctuations
On average, the market has gained 10% per year.
Despite major crashes, it has always recovered and reached new highs.
Check out this chart below from Morning Star.
Can you see how the market always recovers?
Don’t panic sell just because stocks go down and bad news comes out. Focus on the long-term goal.
While inexperienced investors tend to sell in a panic when the market drops, smart investors will invest even more aggressively. Why? Because everything is at a discount!
You need to learn how to value opportunities like market drops to get gains in the long term. Investing when the market is down is where true portfolio growth comes from.
What if I can’t handle seeing my portfolio drop?
Let me give you a quick tip.
If you think you might panic sell when your portfolio drops, you can add more bonds to your portfolio.
Adding more bonds decreases risk and volatility. But remember, bond interest rates are low.
Are you going to take on more risk for a higher return? Or would you rather get rid of some risk and settle for a lower return? The choice is up to you.
You can use a tool like Portfolio Visualizer to test different portfolios out. I have another article that shows you how to use Portfolio Visualizer.
When you are nearing retirement, you want to slowly add more bonds to your portfolio as well. For example, if the market drops when you are closing in on retirement, it might cost you and you may have to retire at a later date because you don’t have enough funds.
Don’t try to time the market
As I mentioned earlier, no one can consistently predict what the market is going to do, not even in the short term. A good investor will create a simple plan and stick to it.
If your plan calls for you to invest at the end of every month, stick to it no matter what the price is.
Remember, the market has an average of 10% per year.
Where can I park my money for a short-term goal (five years or less)?
If your savings goals are for five years or less, you don’t want to put your money into the market.
Instead, try an online high-yield savings account. There are many out there that offer competitive interest rates.
The stock market is not a short-term investment. Any investment in the stock market should be for an average of 10 years or more.
Money for short-term goals could also be put in a certificate of deposit or a money market account. These products generally yield higher than a regular checking account.
Is hiring a financial advisor worth it?
It depends on the individual.
Generally, most people would do perfectly fine without one.
Hiring an advisor is not cheap. Advisors typically charge 1% of your portfolio per year. That’s a huge fee, and it could affect the performance of your investment.
Why hire one when you could create a simple investment such as a three-fund portfolio?
Conclusion
Creating an investment may be a lot of work upfront. However, once that is all behind, all you have to do is continue to save, budget, and invest.
Stocks tend to perform well in the long term, which means you probably won’t see any gains in the short term.
However, don’t be discouraged. Stay within your budget, keep saving and you will reach your goal of financial freedom.
Remember that you are in this for the long term. Good luck!