What’s the easiest way to get rich buying stocks?
This was the million-dollar question members of the motley fool community asked a panel of financial experts recently
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The question was interesting because it appeared as if the investors thought there was a shortcut to getting rich buying stocks.
I was curious to hear what the experts would say …
Here’s what the experts said
First expert: The easiest way to building wealth-buying stocks is not doing what most investors do.
Most investors try to time the stock market and get burned. What an investor should do is try not to time the market. Instead, an investor should invest in stocks for the long term.
He gave the following tips that any investor could follow and get rich buying stocks:
- Focus on buying the stocks of companies that have substantial future prospects for long-term growth, so you can achieve massive gains in the future.
- When you find the stocks of these firms set up an automatic investing programs that add to buy more stocks month in and month out.
- Allow the power of compounding to work on your stock portfolio and you’ll end up getting rich at retirement
Second expert: You should tap into the power of passive investing in the stock market without trying to time the market.
He said buying low-cost index funds afforded an investor the opportunity to invest passively.
The benefits of buying index funds :
- An index fund tracks the returns of a particular market index as closely as possible. As a result an investor sidesteps the unpredictable patterns that come with buying stocks of individual companies.
- An index fund does not have a management team making investment decisions. So the management fees are small
- An Index fund allows an investor to invest in a broad segment of a market. In other words, index funds allow you to diversify your portfolio and, as a result, reduce the risk involved with actively buying stocks
- Low-cost index funds are an easier choice for investors who aren’t able or willing to dedicate the time to pick individual companies.
He concluded that buy-and-hold investors in index funds are far more likely to get rich than short-term traders, and with a lot less effort.
Third Expert: The third expert had a slightly different view of getting rich buying stocks.
He believed that the type of stocks you invest in matters on the long term. His advise was that investors should consider buying stocks that pay dividends
The benefit of buying dividend-paying stocks is that you’ll enjoy both stock-price appreciation and income . In addition investors in stocks of healthy, growing companies that pay dividends will see their stocks’ values rise over time.
Those companies that pay out dividends generate income for their shareholders that can be counted on even when the value of the stock goes down.
He concluded that investing in buying stocks that are strong dividend payers is an excellent way to get rich over time.
My personal opinion:
These experts agreed on one thing about getting wealthy buying shares: that there was no short cut to getting rich buying stocks.
The other point that I think they agreed is that you need to have a long term view when buying stocks.
Why? The answer is simple. The key to accumulating wealth in the stock market is to allow the power of compounding to work on your stock portfolio. Then you can enjoy substantial gains on the money you invested in buying stocks
This means you have to have the self discipline to consistently invest without expecting returns in the first few years of buying stocks.
Unfortunately, most novice investors do not have the discipline and patience to delay gratification when it comes to stocks investing
My experience of speaking with friends and some of my readers suggest they are not willing to wait up to 20 years to build wealth.
The result of most investors desire for instant gratification and getting rich quickly is financial ruin in the markets.
I do not rely on buying stocks to get rich because I believe there are better safer low-risk ways to build wealth
The problem with relying on buying stocks to get rich is that you cannot predict how the stock market will behave. Because there are many factors that can affect the value of a company’s stock
I believe you should buy stocks as part of your investment. But relying on the stock market for your retirement is dangerous. It’s like playing the roulette in a Las Vegas casino and hoping to win the house.
Warren Buffett is one of the richest men in the world who made his fortune from buying stocks.
The difference between how Warren Buffett and the average stock investor buys stock is that Warren Buffet buys the controlling shares of companies in his portfolio
Warren Buffet buys the shares of businesses so he can control the management and protect his investment. The average investor on the other hand buy the stocks of a company hoping that it will continue to perform well.
However the unfortunate thing that the average investor does not consider is that ” past performance of a company does not guarantee future performance”
My personal friend is an active investor in the stock market. He buys options and dividend paying stocks. But he holds a large chunk of his net worth in rental real estate.
He lost $350,000 last year in the stock market in one a trade . It was the income from his rental properties and also his day job that saved him from financial ruin.
On the flip side, he made a profit of $400,000 this year from buying the stock of a company that he never expected to earn immediate gains.
When I ask him his thoughts about getting rich buying stock, he gave this advice : Never rely entirely on buying shares to get rich.
The Bottom line: buying stock should be part of your wealth building portfolio. But you should not invest your entire savings on buying stocks alone to build wealth.
You also need a job, invest in a business and real estate investing so that you can diversify your risk