Investing to Build Wealth

The truth is, you have the potential to learn about investing so you can build wealth over time. Here is some actionable, easy-to-understand research I’ve collected over time.

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Learning investing, stocks, and building wealth can feel confusing when you first get started. There’s a lot of vocabulary to learn, and it’s intimidating.

The fact is, there’s a growing wealth gap in the United States. Between 1989 and 2016, the wealth gap between America’s richest and poorest families more than doubled. Even median-middle-class incomes have grown at a slower rate in comparison to upper-middle-class household incomes.

And earning a high income isn’t enough.

While a high salary may help you build wealth, I’ve come to believe that learning about investing in the stock market can help you build wealth over time.

Why? Because investments can compound.

That might feel daunting. As a layperson with no one to explain to you what the difference between an index fund and an ETF is, you might want to give up just then and there.

The truth is, you have the potential to learn about investing so you can build wealth over time.

When I first started learning about stocks in 2018, I felt the same way. It wasn’t until recently that I finally sat down to understand a little bit more about what an everyday person can do to invest in their future.

This is a collection of the research I’ve done, written for someone who intends to invest in the stock market over a long period of time (10+ years, but ideally 20+ or 30+).

My goal is to share actionable, easy-to-understand information that makes financial literacy accessible. For that reason, this isn’t financial advice. Before making a big decision, speak to a financial advisor about your unique situation!

How do stocks make money?

Stocks make money in two ways: going up in value and paying dividends while you own them.

When you first get started, you might be interested in stock picking.

However, the average person is better off putting their money towards a group of stocks rather than choosing individual stocks.

Unless you can understand the bigger economic picture and educate yourself about a company’s future financial outlook, I recommend putting your money towards a group of stocks like index funds or exchange traded funds (ETFs).

  • Index funds own all of the stocks in a big list. Because you own a variety of stocks, it comes with an overall lower risk. You might have heard some of the most popular indexes: S&P 500, NASDAQ, Dow Jones Industrial Average. You can buy into an index fund for as little as $1, versus ETFs where you have to buy an entire share. Index funds are only traded once per day.
  • ETFs are bought an sold like a common stock on the market. Similar to index funds, ETFs are collections of tends, hundreds, or sometimes thousands of stocks or bonds in a single fund.

The primary difference between an ETF and an index fund is ETFs can be traded (bought and sold) during the day at different prices and index funds can only be traded at the set price point at the end of the trading day.

Putting your money in funds is an alternative to picking stocks, and trying to keep up with the market ups and downs because you are putting your money towards the broader market instead. 

Psychology of Investing

The Cycle of Market Emotions Image Source: Brian Feroldi

Because the stock market can go up and down, there’s a psychology behind the cycle. Euphoria leads to bull markets (stocks are expected to rise), and fear leads to bear markets (stocks fall, and investors sell).

Can you shift your mindset?

One of the simplest ways to avoid getting caught up in the cycle of market emotions is through a practice called dollar-cost averaging. Dollar-cost averaging means you regularly buy a fixed dollar amount of a stock, regardless of the price.

By doing this, you are investing your money in the market whether or not it’s a bear or bull market. Instead of timing the market, you know that more time in the market can help you build wealth.

What are dividends? 

Dividends are money deposited to your account without having to sell a share. Just for owning a stock, mutual fund, or ETF you get paid a share of the profits of the company or underlying companies.

When you own an index fund (which owns all of the stocks in a big list) you get paid dividends collected from ALL the underlying companies.

For example, if you owned Vanguard’s Total World Market ETF ($VT) for all of 2021, you would have received four quarterly dividend payments of $0.25, $0.50, $0.41, and $0.78 adding up to $1.94. That’s just for one share! If you own 10,000 shares, you would get $19,400!

When you’re in the wealth accumulation phase of your career, reinvest those dividends. i.e. when those cash payments are made, use them to buy more share of the funds from which they came. This amplifies the compound growth of investing. Most brokerages offer a simple setting you can turn on to do this automatically.

Then when you retire, you can turn that setting off, and collecting those dividends is like collecting your paycheck!

⚙️ I recommend the NASDAQ Market Research tool to see stock performance and dividend history.

How do I get started?

You can get started by opening an account through a brokerage. I personally use Charles Schwab because they also have a travel-friendly debit card. 

When you’re logged into your Schwab dashboard, you can:

  • Place an order: Go to Trade > All in One and enter the symbol of the share you want to buy.

Before I felt comfortable making my own decisions, I started out using a roboadvisor to manage my investments because I didn’t understand enough, and I wanted a completely passive strategy. 

However, what I would recommend now to someone who feels overwhelmed would be to invest in a Target Date Index Fund. Target Date Index Funds are reallocated annually to become more conservative over tie so you can meet your retirement goals. They are a one-stop, highly diversified solution so you can truly set and forget. 

To do this, search for the symbol of a target date index fund close to the year you want to retire.

  • For example, $SWYJX is the Schwab-managed Target 2055 Index Fund you can choose if you bank with Schwab and you are retiring close to 2055.
  • With Schwab, you can set up automatic deposits into your IRA, and also set up automatic investing so that you can truly set and forget your retirement strategy.

Real Estate Investment Trusts (REIT)

Real Estate Investment Trusts (REITs) are companies that own or finance income producing real-estate. They have to meet a number of requirements to qualify as an REIT, including passing on 90% of their taxable income to shareholders as dividends

For this reason, REITs are known to distribute higher dividends. 

There’s a downside to being a pass-through entity. REIT dividends generally don’t receive the same favorable tax rates that most dividends do.

Additionally, REIT growth is often lower than growth stocks. While it has a place in a portfolio, if you have too much, you risk losing on significant gains. 

Strategy: While tax-advantaged accounts like your Roth IRA may be a good place for an REIT, it doesn’t mean you should allocate a lot of your money towards REITs in the wealth accumulation part of your journey. You can let your index funds grow now, and then when you’re closer to retirement buy a pile of REITs. This is because you are not taxed on realizing gains within an IRA.

Additional Resources

I listen to audiobooks on Audible. If you haven’t already, click here for a free trial so you can listen to one of the books below for free.

These books explain complex investing terms and philosophy in a very simple, easy-to-understand way. I highly recommend them for everyone.

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