Can you begin to imagine the day when you wake up whenever you want? How about the day when you can fill your daily schedule with any activity you want? Even better…How about the day when you no longer have to answer to anybody but yourself? That, my friends, is called true financial freedom.
It is at that moment in time when money no longer plays a role in determining what you do on a daily basis. Money no longer decides when your alarm goes off, the distance you travel to work, the amount of time you spend at work, where you live, nor the people you spend (maybe forced) your time with in a given day. Money is only allowed to determine those things when you aren’t free from money. Think about it…
What is the primary reason that most of us have to work? It is because we literally have to earn money to afford our shelter via rent and mortgage. We have to buy groceries to feed us in our homes. We have to spend money on utilities to keep our power, water, and heat/AC running. Last but not least, we have to afford transportation to get us to jobs that will actually pay us the money to able to afford all of the things listed above!
Bottom line…Life is expensive and we need money to afford it. But how do we get to the point where we have enough money to where a job isn’t required anymore? The point where all of the money we have earned, saved, and invested is now the primary catalyst in funding our lifestyle instead of a paycheck from a job. I will answer this question for you…
YOUR FINANCIAL FREEDOM BEGINS AND ENDS WITH INVESTING INTO STOCK INDEX FUNDS
Before I break down the index fund for you, I first need to shed light on the most devastating trait that we as humans have that will always hold us back financially…It’s our EGO! The human being’s ego has always been one of its crippling Achilles heel. This ego always has us wanting more…and more…And More…AND MORE! We are never satisfied with average. Although this has served us well in a lot of other areas in our lives, it is the single most crippling trait a person can have in terms of their finances.
Want to know a secret that Wall Street doesn’t want you to know? A secret that The Wolf of Wall Street, Bitcoin, pyramid schemes, and other get-rich-quick schemes attempt to hide? This secret is counter-intuitive to our way of thinking, especially the American way of thinking. But here it is…
THE MAJORITY OF SUCCESSFUL INVESTORS SIMPLY CHASE AVERAGE RETURNS
I know what you’re thinking…This makes zero sense. There is no way the average millionaire became financially free because they chased AVERAGE returns! I mean, doesn’t chasing average mean you’re going to be average (i.e. not a millionaire)?
I will tell you this…In almost every other aspect of our lives, chasing average will return you average results. This is the COMPLETE OPPOSITE in the world of finance. By simply obtaining the average total stock market return year after year, decade after decade, I can almost guarantee you that you will become a millionaire. I say “almost” because it depends on time and the amount of money you invest into the stock market, but if you play your cards correctly early enough, then you can EASILY become a millionaire.
What is a Stock?
The first step in understanding what a stock index fund is, is first understanding what a stock is. A stock is a tiny piece of a company. When companies go “public”, they issue off pieces of the company by selling shares (stock) to the general public. When you buy these shares from the companies, you in turn become a co-owner (shareholder). The keyword in that last sentence is “owner.” When you become an owner in a company, you are entitled to a portion of the profits. Now there are two ways you can earn money off of owning stock in a company, and they are:
#1 – The stock appreciates in value.
What this means…Let’s say you buy 1 share (stock) in a company you really like. The price of that stock was $20 when you bought it. You then hold that stock for 1 year, and after that year its value is now $30. That means your stock has grown by $10. In terms of percentages, your initial $20 investment into that 1 stock has grown 50% in one year!
#2 – The Company who owns the stock may issue dividends to its shareholders (YOU).
Companies may sometimes pay out dividends to the shareholders in the company. This is usually done quarterly (every 3 months) and it is a reflection of the company’s earnings. Essentially, when a company has earnings, it divides the earnings up among the shareholders. This stream of income provides you a consistent return regardless of what the market/value of the stock is doing.
Dangers of Investing in Individual Stocks
Although owning stocks provides you with ownership in a company, there are many dangers to owning individual stocks…
#1 – It is IMPOSSIBLE to know what any individual stock will do in the future.
Regardless of what you may have read/heard/seen, NOBODY knows whether a stock will go up or down in value. It is flat out impossible to 100% know what any given individual stock will do in a given period of time.
#2 – You aren’t diversified.
Let’s say you really like Amazon and invest all your savings into stock in Amazon. You believe it is a good company (so do I) and think the stock will only continue to go up in value. Well I hate to break it to you, but the stock market works in mysterious ways. What if, overnight, Amazon’s delivery service went into the toilet and they no longer provided fast delivery service? Your stock could shoot down in value, losing you A LOT of money, and you had no idea that this event was coming. By putting all your savings into this one stock, you are now solely tied to this company. If the company thrives, you thrive, but if the company tanks, well…I think you get the point.
#3 – Emotions & Ego.
Being 25 years old, I see this all too often. I have a few friends/colleagues who invest in individual stocks and are doing quite well for themselves. They are earning A LOT more than what the S&P 500 (market) is earning.
***In case you know nothing about the stock market/S&P 500, all you need to know is that since 2009, the stock market has been on an absolute tear. It is setting record highs almost daily right now, meaning stock market investors are earning A LOT of money.
Since the market has been on such a tear for the past several years (almost decade now), it hasn’t been that hard for individual stock pickers to earn better returns than the market. What does this mean? For those who have been earning better returns than the market, it is potentially providing them with a false sense of confidence that they are some expert stock picker like Warren Buffett. I have got news for you…They aren’t.
I applaud anyone who has beaten the market in the short-term and I hope you earn all the money you can, while you can! Unfortunately when the market eventually begins to go down, most of these individuals won’t know how to react. This often leads individual stock pickers to panic and abandon principles. They could begin to sell all their stocks for losses, try and find new stocks that will most likely lose them money, or even worse, it could make the stock picker pull all their money out of the market and never invest again.
Now I know you may be confused again…I just told you why stocks can benefit you financially, then all of the sudden I freaked you out with how dangerous they can be! If picking individual stocks is dangerous, then how can I pick stocks and not worry about losing money in the long-term?
Well ladies and gentleman, let me introduce you to the only investment you will EVER NEED…
Stock Index Fund
ALAS! We have finally arrived to our almighty savior in achieving true financial freedom! The stock index fund alone can provide you with everlasting wealth for you and your family. I am sure you have heard the name “index fund” before, but have no idea what it actually is. If that’s the case, then I have good news for you! I am going to break it down in very simple terms for you to understand, using the most common/famous index fund out there.
S&P 500 Index Fund
The S&P 500 Index Fund follows/tracks the 500 most commonly held stocks on the New York Stock Exchange. It is a good, accurate representation of how the U.S. economy is doing. In simple terms…If the companies that make up the S&P 500 are doing well, then the U.S. economy is doing well and vice versa.
In case you were wondering which companies are in the S&P 500, here is a list of the 10 largest companies within the S&P 500:
3. Alphabet Inc. (Google)
6. Berkshire Hathaway
7. Johnson & Johnson
8. JP Morgan Chase
9. Exxon Mobil
10. Bank of America
There are a few reasons why you should be investing your money into a stock index fund TODAY. I always tell beginning investors to simply put their money into an S&P 500 index fund to start with…Why???
#1 – Diversification
Diversification is absolutely critical when investing in the stock market. This means that you are spreading your money out to many different companies instead of only a few. The reason you do this is because it limits the risk of losing your money. When your money is spread out between hundreds (potentially thousands) of different companies’ stock, then you are less likely to lose your money if a few of those companies begin to go downhill.
If you invest in the S&P 500 Index, then your money is spread out between 500 (technically 506) different companies. You will own a tiny piece of all of those corporations that make up the S&P 500, and you will profit financially as they profit.
I don’t know about you, but I would much rather own a small piece of the company Apple through an S&P 500 index fund, than to waste my money on a new $1,000 Apple phone.
START BECOMING AN OWNER, NOT A CONSUMER
The only downside to investing in any type of index fund/mutual fund (more on mutual funds in future posts) is that there are costs involved in financial institutions managing your money.
GREAT NEWS!!! The index fund takes care of this.
I always recommend opening a Roth IRA or taxable account with the financial institution Vanguard. The Roth IRA or taxable account is where you would be buying an index fund. This is because they are the essential kings of the index fund. They charge the lowest fees in the game when it comes to managing your money. For example…
If you invest $10,000 into the Vanguard S&P 500 Index Fund, Vanguard will only charge you an expense fee of 0.04% annually. That means you will only be charged $4 for that $10,000. Talk about low fees!!!
#3 Long-Term Growth
I wouldn’t invest my money into any product that doesn’t have a long-term consistent track record of returning positive results. Remember how I told you earlier the secret that Wall Street doesn’t want you to know? The secret that most successful investors simply try and obtain the average returns of the stock market? Well…Do you want to know the reason why simply chasing the “average” returns of the stock market is so profitable?
THE AVERAGE ANNUAL STOCK MARKET (S&P 500) RETURN OVER THE PAST 40 YEARS IS 11%
Don’t simply gloss over that statement. Process that number for a minute (maybe even two minutes). The average annual return of the stock market has been 11% for the past 40 years…
Most people just simply park their money in a savings account that has in interest yield around 0.03%. I will break this down to you in a simple scenario to highlight the MASSIVE financial difference of these 2 annual returns.
Sam & Sally
Sam & Sally are best friends. They are both 25 years old and have been working for a couple years since graduating college. Sam is interested in the stock market and wants to begin to invest his money for the long-term. Sally on the other hand is completely scared of the stock market and never wants to invest her money into it.
Sam decides to open a Roth IRA. Sam is going to max out his Roth IRA every year for 35 years, when he expects to retire at the age of 60. The max Sam is allowed to put into his Roth IRA every year is $5,500. All Sam wants to do is invest his money into the S&P 500 Index Fund so that his money is diversified and returns him the market average. Here are the steps Sam is doing:
1. Opens a Roth IRA with Vanguard
2. Funds (transfers money from his bank) his Roth IRA to the annual max limit ($5,500) every year for 35 years
3. When the money is transferred into his Roth IRA, he then uses that money and invests it all in an S&P 500 Index Fund
4. The money grows 11% annually
Sally on the other hand has no interest in the stock market. Just hearing the word “invest” scares the crap out of her. She avoids any conversations about investing and stock market and simply parks her money in a simple savings account for the next 35 years. Here are the steps Sally is doing:
1. Opens a savings account at a local bank
2. Puts $5,500 in that savings account every year for 35 years
3. The money grows 0.03% annually
Sally does this because she believe it is “safe” to put all her money in a savings account. What Sally doesn’t understand is that a little thing called inflation is eating away at her money every year for 35 years.
Inflation essentially is the cost of living increases every year. This is why your rent, groceries, sporting event tickets, Chipotle burritos, etc., become more expensive every year. The current rate of inflation is around 2%. Now what does this mean…
IF YOUR MONEY ISNT GROWING AT THE SAME RATE AS INFLATION, THEN YOU ARE ACTUALLY LOSING MONEY
***This is the essential reason why you MUST INVEST. If your money isn’t growing at the same rate as inflation, then your money is losing value over time.
Sam & Sally Result
Sam & Sally are now 60 years old and ready to pull all that money from their accounts. Sam is pulling money from his Roth IRA, where his S&P 500 Index Fund investment has been growing at an annual rate of 11%. Sally is pulling money from her “safe” savings account that has been growing at an annual rate of 0.03%. Here are the results after 35 years…
Your eyes aren’t playing tricks on you…
Sam’s investment account grew over $2,097,089 more than Sally’s “safe” savings account. For those of you who believe that parking your money in a savings account is the “safe” way to go, do you still think that is smart? The results are drastically different, and all Sam did was invest in an S&P 500 Index Fund that merely returned him the “average” results of the stock market.
Don’t be scared of the stock market anymore. Don’t run away or close your ears when the word “invest” is brought up in conversations. YOU NEED TO INVEST. If you don’t, you will work for the rest of your life and money will always control your time, instead of you controlling your time.
All you millennials out there…All you need to do is invest in an S&P 500 Index Fund that will earn you the “average” market return. If you’re smart, you act NOW! The faster you act, the better your odds of becoming a multi-millionaire and achieving true financial freedom.