From my own experience and observations from working with others, stocks can create wealth for some, but for the vast majority of individuals, wealth is created through good behavior - not good investments.
Stocks can certainly have a large impact on growing your wealth, but the creation of wealth comes from behaviors; enhancing your ability to earn money, and spending less than you make.
The markets have had a volatile start to 2022; as of 5/16/2022, the S&P 500 is down -15.9% since the start of the year.
I love working with young professionals because my advice during these times is: who cares! You don’t need the invested money anytime soon, so who cares what your bank balance says? In addition to that sentiment, you are adding to your investments in your retirement accounts, HSAs, taxable accounts, etc. and are buying into discounted market prices. This will shorten the recovery period of your investments by putting more money to work.
This advice does not stand if you need the money in the short-term; unfortunately, this may be a tough lesson for many. Stocks don’t always go up, and you need to be protected during these times to ensure you don’t sell your investments for cash at down prices (and miss the recovery).
Beyond lecturing on emergency funds and having lines of defense (read my prior blog, Layers to this), this blog is more about the process of creating wealth.
Investing is sexy! It is forever touted with flashing green, millionaires, and seen as the key to wealth. But, the reality is that wealth is built elsewhere; while investing enhances that wealth that you’re building.
Sure, there are some stock market geniuses like Warren Buffett - but he is a household name because of how uncommon it is.
The likelihood of picking a stock winner that brings you a bigger return than the market is small; and doing it over the next 30 years until you retire is virtually impossible.
Below is my opinion on the best, and most reliable ways to build wealth. It is slow and boring and doesn’t get news coverage. But patience is a huge asset here and those who stick with it will be rewarded in a big way.
Create Wealth
Here are some of the primary ways to create wealth early in your career:
Spend less than you make; no need to keep up with the Joneses or overextend yourself on a big house and mortgage. Keeping a modest lifestyle brings opportunity to save more money, or not work as hard or long as others spending more.
This isn’t to say start pinching pennies, but at least get clear on your values and what you like to spend your money on, and stop spending on things that don’t fit that description.
Human Capital; your ability to make money as a young professional, or your earning potential, is your biggest asset early in your career.
This is the other side of the “spend less than you make” equation. Making more money can be done by growing your skills, investing in yourself or a new business, etc.
Control what you can; you can’t control how the stock market is going to perform, but you can control how much money you’re going to add to your investments each year. Don’t focus on setting goals around the balance of your accounts, but instead how much you’re going to contribute to those accounts.
Focus on the long game; as I mentioned, patience is key. Imagine early in your career you saved $100k and the stock market is up 10%; you made $10k! But when you retire, your portfolio is $1mm and the stock market is up 10%; you made $100k! It may have taken you your entire career to make a $100k salary, but now you’ve built a portfolio large enough to replace that income.
Most people don’t need really big investment returns early on (of course we all want it). Focus on the long game and making progress every year, and relieve any pressure of doing it as fast possible.
This comes from consistent, good decisions; not one amazing outcome as a result of a giant risk that got you rich (as this more than likely results in getting you poor, not rich). Enjoy the journey of building wealth, and stay patient. The reward is worth the wait.
Protect Wealth
Not only do you have to work on building your wealth, but you also have to protect it. This paragraph is pretty easy: all you have to do is put all your savings in permanent life insurance.
Just kidding, couldn’t help myself… permanent life insurance is a great way to build wealth for the salesperson and insurance company, not you.
Here are some ways to protect your wealth while you’re building it:
Emergency fund; I literally just said I wouldn’t talk about this, but an emergency fund is a great way to put a line of defense in front of your investments. This creates access to cash during short term needs, so you don’t have to sell investments at a time when markets are down.
Insurance; jokes aside, disability and life insurance are important aspects to a financial plan. Disability insurance protects your ability to make income if you become disabled and can’t work. Term life insurance protects your human capital if something happens to you while another person (or people) is relying on you or your income.
Taxes and fees; government bodies are always trying to take your money for their budgets. Taxes and fees are typically the biggest drags on a portfolio; pay attention to them and make sure they are bringing you value; otherwise, minimize them.
Avoid scams; probably obvious, but scams are getting sneakier, especially with the crypto craziness, MLMs posed as running your own business, etc. Be careful out there.
Don’t rush the process; this goes to my prior section, but there is no need to try to hit a home run. Making one bad investment can ruin years of progress in a very short time. Stay consistent, and don’t get greedy or risk too much in one investment / idea.
Asset protection; this is a blanket statement, but it seems everybody is coming after your money. Be careful, and watch for how you are titling your accounts. States have different rules on asset protection, so it is hard to give any decent advice, but a few things that come to mind that you can look into include; trusts, FDIC insurance, partnership agreements when going into business, business / umbrella insurance, etc.
Grow Wealth
Once we start seeding our investments and making sure they’re protected, it is time to focus on growing our seeds.
Here are some of my rules that I live by when it comes to investing;
Be consistent; always be investing! Set up a recurring investment and consistently buy into the market. If you put the same amount into your investments each month, you’ll be buying more shares when prices are down, and less shares when prices are up - without any extra thought!
Don’t sit on cash while waiting for ‘the dip’, just consistently invest. This more often has a better outcome than waiting for the dip, because even after a dip, the value of the stock market is often higher than when you were originally considering investing.
Control what you can (take two); you can’t control the returns of the stock market, but you can control where and what you’re investing in. You can also have an investment strategy that helps you to ride any volatility in the market, instead of cashing out at a loss due to market fears.
Risk is reward; it may be exciting to try to choose an investment that triples your money next week, but doing that comes with a lot of risk. Taking on more risk brings you a higher EXPECTED return to compensate you for taking more risk. That expected return has the potential of not reaching its expectation, and that 3x investment may be just as likely to go to $0.
Give it time; I must reiterate this. Give it time, and keep it boring. This strategy takes time, but it is worth the wait. I’m not sure if it is actually proven through research, but I am pretty confident to say that time is the most important factor to investment success.
This section largely talks about stock investing because it has very low barriers to entry, and in my opinion, requires the least amount of work. You need some baseline information, or you need to hire a person or service if you’re not comfortable investing yourself, but this can typically be done at very low cost.
Final Thoughts
There are many ways to use capital to build wealth, but the point I am trying to make is that you need the capital before you can even decide how you’re going to grow your wealth. And getting that capital comes from creating wealth first; followed by enhancing that wealth through investments.
In my opinion, young professionals should stop worrying about what the stock market is doing - just ignore it. The stakes are lower early in your career, and you should be focusing on putting more money into the market, not what the money in the market is doing.
If you have $10k invested and somehow picked a magic stock that doubled in a year, you made $10k. But, if you were able to save $1k from your income each month, you increased your portfolio by $12k - or 20% more than luckily picking that stock.
Now if we talk about realistic numbers like 8% - 10% average return from stocks over the long term, your contribution amount (in % terms) will way outperform your market performance for a long period of time. Focus on the more impactful actions of contributing to your portfolio, as opposed to tracking what the market is doing.
Its time for us to accept that if you’re bored by your investments, you’re probably doing it right. And if your investments bring you a lot of excitement - it may be time to reconsider what you think investing is.