Investing your money wisely.
After you successfully started your own business, and are making an above average income that you can use for investments, how to invest that money now?
To be honest with you, every investment vehicle that you chose will have a certain risk that it includes.
That leads us to the question where the risk is the lowest, and where the returns can be maximized and where you can start with a small amount already to see distinct results, at least over time.
Let’s look a few years into the future and assume that you are a successful entrepreneur.
Not necessarily the next Bill Gates, but you have a nice 6-figure income which is appropriate.
From a 10.000$ of monthly income from your business, 3.000$ will be for you and your family to live comfortably.
Let’s also assume that you will have some bad months and will “only” have 7.000$ a month, from which 1.000$ you decide to reinvest into your business, leaving you with 3.000$ a month for investment purposes.
Remember that a business is not always able to give you steady paychecks as an owner.
Now I am sure you have heard a lot about investing in the stock market already.
Probably some horrific stories about someone who lost their money and that it is very complicated to understand.
Well that might even be true, but during the last few years there has emerged a form of investing your money that makes it a lot easier, less complicated, and reduces the risk over the long-term.
I cannot tell you how exaclty to invest in stocks here in detail, as there are so many books and details on it that it would take another book to only give you an overview of what’s important and what things to watch out for.
It is also not part of the system I want to introduce you to to become a stock investor who picks individual stocks and does due diligence analysis on operating figures and striving through corporate balance sheets all day.
There are different reasons why I would not recommend you to do this, unless you have experience already in this field and want to put money at a certain risk. Because this tpe of investing will always carry substantial risk.
For example, even if you find a company with an attractive stock that would make a great investment according to all numbers on the balance sheet and you are also right about your intuition, that does not mean that the market or a significant amount of other investors will do the same thing with their money.
And ultimately the individual stock only goes up if “the market” sees it that way and others invest their money as well.
That means even if you are right, you need other people in the market to buy the same stock to see its course go up, and there is just no guarantee available that this can or will happen.
And that ultimately makes every form of stock picking a form of speculation, even with the most scientific approach because you can never tell how the other players in the market will behave, and that is what ultimately determines the course of a stock.
So this is a very risky way of investing your money.
Instead of focusing on individual stocks to go up, the easier way would be to focus on the entire market itself.
In contrast to the individual stock’s performance, which is in most cases unpredictable, the movement of the stock market as a whole can at least be anticipated.
For instance, we know that on average every 10 years there will be a market correction or crisis.
But over the long-term, since the 1930s the markets have always gone up every year.
The reason is simple: with more and more money pouring into the financial system to not be eaten up by inflation and to provide the shareholder value that is asked for by big corporations, they have to innovate and grow year after year.
No growth or stagnation for a business equals death in such a market.
That is what makes companies in itself a wonderful investment vehicle!
If you invest your money in a building, by itself it won’t grow and stay the same as it is unless you take direct action on it.
A company on the other side has the possibility and usually also the duty to grow and expand constantly to ensure its survival and to gain or sustain market share.
That means certain companies all over the world will try their best and continue to grow year after year, which results in an average 6-7% annual return that you can expect, despite all crisis and corrections.
But don’t just take my word for it - here is what Warren Buffet says about it:
“The economy, as measured by gross domestic product, can be expected to grow at an annual rate of about 3 percent over the long term, and inflation of 2 percent would push nominal GDP growth to 5 percent, Buffett said.
Stocks will probably rise at about that rate and dividend payments will boost total returns to 6 percent to 7 percent, he said.”
Now the only question left is this:
how do we tap into the power of the market as a whole?
Luckily at the time of writing this there are many options to achieve this and to make it short, the best answer is an index fund with low costs that is mimicking the market.
Index Funds are also more commonly known as ETFs and a very popular vehicle for investing one's money.
While the classic mutual funds often have high expenses that you will be charged as a customer and that thereby will eat up all your capital gains, index funds are passively managed and have only a minimum amount of costs.
Pay attention to compounding costs as 2-3% as in most mutual funds at first do not sound like much, but these percentages compound over time and result in an enormous fee.
Plus, most mutual funds do not beat the market and underperform it instead, even though they advertise to do just the opposite.
Warren Buffet had a bet with a group of Hedge Fund managers in 2007, that a low-cost index fund will beat the performances of their hedge funds over a 10 year period.
The loser will have to pay 1 million dollars to charity.
What do you think, who won the bet?
A low-cost index fund, or some of the world’s best Hedge Funds?
You probably guessed it already.
In 2017 Warren Buffet won the bet - his index fund had a compounded 7.1% per year, while the hedge fund only made 2.1%, according to the Wall Street Journal.
If a billionaire and star investor does it, maybe we also should put our money in an index fund to let it grow.
Note also that during this period there was the big economic crisis of 2008 with losses of more than 40%, and still this incredible return was achieved.
The most recommended index funds are those provided by Vanguard, although there are also some other interesting offers by now.
Like a business, the investment vehicle has to be right for the owner, so I would always suggest to make your own due diligence before you invest and see if you and the fund you choose are a good fit for each other.
With our previous example whereby you had 3.000$ per month to invest, at an average of 7% interest per year, after only 10 years you would have a capital of 516.251,58$ in your investment account.
If you can keep it up to 15 years of such a savings rate, your account would be worth an incredible 938.945,91$!
I know 3.000$ per month is a lot of money, but exactly this is the reason why you need to have a business in step 1, to provide you with the capital needed for further investments to grow and expand your accounts until you ultimately achieve financial freedom.
After these 10 years of saving, say you lose your business or can’t afford 3.000$ per month anymore to invest and are left with the capital of 516.251,58$ in your account.
If you do not save a penny anymore, with again an average 7% market gain per year you would receive 36.137,61$ per year only interest payment!
That is enough money for most people to already live comfortably, and this can be yours after 10 years of work as soon as you have your business running!
How about that for an early retirement?
Clearly, if you cannot invest 3.000$ per month, you will have to start with a smaller amount. The most important aspect is to start at all - no matter how slow or low.
By being invested in the stock market you will receive interest and become a winner in the game of our economy.
You will not become rich fast, but with persistence and hard work you can make it in the long run, and that almost predictably.
That makes it a solid way to invest our money for the long term.