The stock market is one of the great money mountains of investing to achieve financial freedom.
Tapping into the stock market money mountain requires a change in your mindset and understanding of the principles for wealth creation.
There are myriads of stocks, and exchanges for investing all over the globe. The news media, chat rooms, websites, financial newsletters, and even relatives can overload you with information.
The critical question for beginner investors is how to sift through the mountain of information and stocks to achieve financial freedom.
This article will address the question of whether the stock market may help you accomplish financial freedom
It is essential to address some critical issues for you to clearly understand how to approach investing in the stock market.
When it comes to getting rich investing, there are three important factors:
- How long you invest in the stock market
- How much you invest
- and what rate of return you can achieve on your investments
How long you invest is dependent, on the period you have for your financial freedom goals.
Let me explain.
Let us say you want to invest in the stock market, so you can have additional income to supplement your retirement, you have a longer time horizon to work with.
However, when you are saving for a significant expense like college or to buy a new house, you have a short time frame.
The most significant benefit of investing with a period is compound interest. When you invest over a long period in the stock market, you can become wealthy by the law of compound interest.
There is a brilliant article by the Cato institute called Tapping the power of compound interest I recommend you read it too so you can grasp the impact of compound interest.
You can also see the power of compound interest in this visual illustration.
How much you invest depends on your income and risk tolerance level.
You can invest a lump sum or a drip sum…that is, you put a little monthly contribution into a fund. Whichever method you choose, it’s essential to maintain consistency, because consistency is the name of the game. Your rate of return varies in the stock market, however, most financial experts cite an average return of 11 percent for the Dow Jones Industrial average. This figure is representative of the total universe of stocks.
You now understand that investing in the stock market, depends on how long, how much, and how often, and the rates of returns on your investment.
With this background, you are now ready to have the three core skills to tap into the stock market money mountain.
Skill#1 Filtering. You need to have a method or tools to sift through the gravel of stocks and uncover one or two stocks to build your wealth portfolio. My advice to a beginner investor is to but a wide range of stocks in all the sectors. How do you do this? Buy index funds. An index fund mirrors the movement of a specific index of a specific financial market. Index funds are an alternative for the beginner investor who does not have the time to actively trade stocks in the market. Studies show that trying to forecast the stock market is like playing Russian roulette.
I would like you to go to Yahoo finance. Search for the Dow Jones Industrial average and check the historical movement chart to understand my point. You will notice that the trend is an upward one with dips in between; these dips were the market crashes in the last 7 decades. It’s important that most of the market dips were unpredictable events; even the most sophisticated systems could predict these market crashes. If you invested into the market with index funds, you will not lose money because over time, if you stayed in the market even during the rough times you will still end up wealthy. This brings me to the next point…the second skill you need to have
Skill#2. Timing in. This one skill involves having criteria for investing. Majority of the most successful investors have criteria for investing in the stock market. Setting criteria for investing, comes from having an understanding of the industry, you are investing into, your expected rate of returns, economic cycle and how it affects the stock market, market sentiment. There are tools available to help you make the right decisions. It’s not enough to have invested into the stock market it’s also important to have the next skill…
Skill#3 Timing out. The ability to know when to take your profits, and cut your losses in the stock market will break or sink you. You need to know when to take your profits. You are able to take profits if you have already set criteria for investing in the stock market.
The stock market is a great source of wealth creation. The first step for anyone starting out investing is to educate himself, you then determine why you are investing in the market and finally…filter the stock market for the stocks that will get you your result, know when to get into the market and when to reap your profits.
The road to financial freedom in the stock market is a slow, steady and calculated journey. You can achieve wealth using these skills.
Think rich and grow rich