By Ee Hsin Kok. Edited by Arjun Chandrasekar.
Getting rich. It’s the goal of many, if not most people in the world. After all, money can solve a lot of problems. In pursuit of this goal, many people flock to the stock market thinking that it can generate wealth and lead them to the upper class of society. So is it true that the stock market can make you rich? And how easy is it to get rich from the stock market? The answer to that is… it depends.
The Surefire Easiest Method
There is actually 1 very easy way to get rich through the stock market that has worked in the past, will work today, and has a very high likelihood of working in the future. All you have to do is this:
1. Get a job
2. Set aside as much as you can from every paycheck and put it in a brokerage account
3. Buy an S&P 500 ETF (like SPY).
This is all it really takes. And I’ll prove it to you. Let’s say you earn an average salary in the US of $40K per year, and you take home around $29K after taxes. If you live within your means (stop yourself from buying avocado toast and overpriced Starbucks coffee), you should easily be able to save at least $2000 every year from the age of 22 until 65. When you take that 2000 dollars every year and invest it into an S&P 500 ETF like SPY, at a long-term annual return of 9%, your $2000 annual savings would turn into $1,042,395.77. Leaving you with well over a million dollars to retire with.
And this is all done on an average salary. If you earned more or were able to save more, like $5K per year, you would have $2.65 Million dollars to retire!
The Not So Easy Methods
Not everyone has the patience to let their capital sit in a broad index fund ETF and slowly grow year over year. Some people are searching for alpha (excess returns compared to a benchmark index), they want their money to grow quicker than 8 to 10% per year, or they want to avoid the massive bear markets that will occur every 5 to 6 years. If you are one of these people, then making money in the market is not going to be as easy. In fact, not a SINGLE hedge fund has outperformed the S&P 500 since 1994. However, it is possible. Warren Buffet, a man who focuses on the fundamentals of companies and avoids short-term price movements and news, has achieved an insanely high average annual return of 20% over the better half of a century.
A Healthy Mixture
Chances are, especially since you’re reading this article, you’re someone quite passionate about investing. And so it’s probably quite unlikely you would be willing to let 100% of your capital sit in broad index funds. In fact, you probably think you’re knowledgeable enough to outperform the market in the long run. And maybe you are, but maybe you’re not. So you should probably have a healthy balance of the two. If you’re an aggressive trader, remember that over 80% of retail traders lose in the market, so practice good risk management and try to put at least 20% of your capital into a broad index fund; if you’re an investor and you like analyzing and investing in select individual companies, remember to diversify across different industries and stock categories, don’t let 100% of your portfolio be speculative growth stocks.
Finally, keep in mind that it is not going to be easy. The easiest path is to invest in the S&P 500 and close your eyes. There will be times of massive underperformance and huge drawdowns. But keep your head up, because it’s a noble cause to search for alpha, no matter how difficult it may be.