Index funds.
They are the best way to make money in stocks. Index funds put their money in indexes like the S&P 500 or the Russel 1000. Index funds are passive, their fund managers don’t keep buying and selling stocks to “beat the market”. In fact, their objective is to be the market.
A lot of research has shown that active fund managers fail miserably while trying to beat the market. In fact, more than 90% of actively managed funds fail to beat the index. So the index fund approach ends up earning a better return. They also have less risk since you’re exposed to the entire market. If some random company implodes and the stock goes to $0, it doesn’t matter.
They’re also a lot easier to run, so the fees are lower. The taxes are lower too since the fund managers aren’t buying and selling all the time.
Index funds really are a free lunch:
- Lowest costs
- Better returns
- Lower taxes
- No effort
- Less risk
You can also diversify easily through index funds. By nature, they help in diversification, but you can go a step further. You can pick a few index funds across US stocks, international stocks, and bonds. A lazy portfolio like this gives you lots of upside and low amounts of risk that’s super easy to manage.
I recommend making at least 90% of your portfolio through index funds.
How to pick individual stocks (if you must)
I understand you will have the itch to buy individual stocks.
But I am not going to sugarcoat it. Buying stocks is brutally hard.
The odds of successfully picking individual stocks are very low.
From 1926 to 2015, there have been 25,782 distinct stocks.
During these 90 years, the stock market rose $32 Trillion in value. Half of the gains came from JUST the top 86 companies. 86 out of 25,728! The remaining wealth was generated by the top 1000 stocks. That’s only 4% of all the companies.
The odds of success by buying individual stocks are very slim. Just 4%.
That’s why I recommend using only the remaining 10% of your investment capital to buy individual stocks.
I pick a few stocks myself but I keep it well below 10%. I get to scratch the stock-picking itch, eat plenty of humble pie, and then get back to my day.
Have fun with 10% of your portfolio, just don’t go beyond that. Keep the other 90% really boring. You’ll make a lot more money.
Advanced Tip: If you’re really smart, instead of investing in individual stocks that have a very low chance of being successful, you could use that remaining 10% to invest in yourself. You might see even greater returns when you invest in your career or a business. Plus when you invest in yourself, your gains aren’t capped at 10-15%. Instead, you could earn 1,000% or more.
Automate your investments
I’m a huge fan of automating investments. Go into your investment accounts and set a specific amount to get transferred automatically every month
Automating achieves three purposes.
First, you are not trying to time the market. Investing each month allows you to average out the gains and losses. It also makes for smoother returns. When you invest each month, if the market is high, your portfolio still grows. If the market is low, you are buying stocks at a comparatively lower price which will eventually go up.
Second, you don’t forget to actually invest. By setting up automatic investments, you are truly embracing the “set it and forget it” strategy. You’re not relying on yourself to invest. We all forget to do things. With investing, forgetting to invest will rob you of more returns than any recession will. Don’t rely on willpower or your memory, get it automated so you never have to worry about it again.
Third, you can spend freely on the rest. By setting up an automatic transfer to trigger right after you get paid, it never feels like you had the money in the first place. Set up transfers for your investments and savings, set aside enough money for major bills like rent or a mortgage, then spend the rest freely until next month. You’ve done the hard work of taking care of your future by setting up the automatic investment, now go enjoy yourself by living your rich life. Automatic investments allow you to enjoy the present while securing your future. You can have it all.
Once you’ve successfully saved enough money (and then some!) to retire, it’s important to find opportunities to enjoy the fruits of your labor. In episode 77 of my podcast, we meet a couple that has a huge nest egg, but can’t bring themselves to spend it.
