I hate to break it to you, and to everyone who sells this myth… but, the stock market is not what is going to get you rich…
There, I said it.
Too many people have been sold this myth that if you invest in the markets, you’ll get rich, guaranteed. That it’s as simple as that. You’ve been told that the stock market is some type of magical thing that instantly rewards those that put money into it. Guess what? It doesn’t work that way.
Now here’s the truth… the stock market can help you BECOME rich over… like 30 years! The stock market can help you STAY rich, over a long-period of time… but it won’t MAKE you rich anytime soon.
Here’s what I mean and here’s what you’re going to learn in this post:
- Some people actually do get rich from the stock market: they are the brokers, hedge fund mangers, advisors, and for a lack of a better term, the middlemen.
- The stock market is actually just a place to allocate capital and over time, has the best chance of effectively fighting inflation
- There are a couple places where you actually might get rich sooner, and I suggest you double down on them
- Should you still invest?
Let’s get into it:
Where are the customer’s yachts?
This is the title of a book written by Fred Schwed, that sheds light on the hypocrisy of Wall Street. The story goes, there was a visitor walking around New York and noticed that all the brokers on Wall Street had large yachts in the harbor. They asked this question wondering where the customer’s yachts were. It was obvious that the brokers and middlemen were doing well, making large amounts of money for themselves, while brokering investing deals for customers. The question was: how are the customers doing? It’s obvious that the people giving the advice were doing well, but what about the people receiving their advice? The observation is that the brokers are doing well, but the broker’s customers?… not so much.
This statement is going to be super unpopular with a bunch of people inside the financial industry, but here it goes…
It seems that the people who do the best in the stock market, are the people managing other people’s investments, not necessarily the investors themselves. Meaning, they are brokers or fund managers who invest other people’s money, and make a nice living by charging fees or commissions on that money they are managing.
I know that plenty of people have done well for themselves in the stock market and most that have done well in the stock market, did so over a long-period of time. I know that… I get that… I’m not debating that over a long-period of time, most people do very well for themselves in the markets. But it seems that investing has been romanticized to the general population that there’s this potential to get rich, pretty quickly. That’s just not the case 99.99% of the time. Okay, some people have hit it big with an IPO or a hot stock, or some type of gamble… but they got lucky. That’s the exception, by a long-shot.
Taking a Long View
So I want to change this crazy idea that you can get rich in the stock market in anything less than, let’s say… 25-30 years! The problem, is that this ‘get rich quickly’ myth, and the idea that everyone HAS to invest, is perpetuated by the industry itself. Of course though, right? Hedge fund managers are paid more when new assets come in. They typically charge 2% of the total amount of money they manage AND take 20% of returns. Brokers are paid commissions on new assets that come in and receive a hefty commission on new products that they sell. Might there be an inappropriate incentive for a broker to sell products that aren’t appropriate for some investors? Incentives are squarely placed on assets coming in, not necessarily the proper or fiduciary-based advice, going out.
The huge caveat here is that there are plenty of those advisor “middlemen” who are excellent at what they do! They typically hold themselves out as Financial Planners and often focus on planning first and investing second. In my opinion, these good ones are worth their weight in gold. They should help you define your goals, and find out what is important to YOU. They should be fee-only, and should talk openly about exactly what everything costs. They can help you create an actual plan, free of product-sales, and full of value. They should be a Certified Financial Planner and you should feel comfortable with them. These are the good ones, and these are the exception to the stereotypical “middlemen.” The ironic thing is that these good advisors, will actually tell you this same advice. They’ll remind you that investing is a long-term thing. They’ll hopefully tell you about all of the academic research that they use to guide their investment management and they’ll be realistic about the time that it takes to become wealthy in the stock market. They should tell you that, “It’s not about timing the markets, it’s about time IN the markets.”
What is the Stock Market Good For?
After all that, you might be thinking, okay… I don’t think I want any part of the stock market. I’d say that you’d be making a huge mistake. So, stick with me, there’s more to the story.
How I recommend that you think about the stock market:
The stock market is a place to allocate capital, not a place to get rich.
Again, the truth is that if you steadily invest over the next 30 years, you may (and actually probably will) become rich through stock market returns… but that’s over 30 years.
The stock market is actually just a place to allocate capital. It is one of the best places to sock away the money that you earn as income, to beat inflation. If you take the money that you earn from your job and put 100% of it in your savings account, you’ll get next to nothing for a return on those dollars. There’s virtually no risk to having that money there, and it’s very liquid. For the privilege of having your money readily accessible today, and with virtually no risk, you give up return potential. The stock market, on the other hand, has historically averaged around 8-10% returns over the past 80 or so years. There’s obvious and inherent risk to investing in the stock market, however. Stocks can go to zero. The stocks that you buy, are ownership stakes in the companies that you’re purchasing stock of. Those companies can go bankrupt. They can crash. Over time, and because the larger stock market is made up of thousands of companies, the likelihood of them all going to zero is not good. But nonetheless, that risk is there. Another way to mitigate stock investing risk, is investing in funds (like index-funds), which I won’t go into detail here.
The long-term inflation rate has historically hovered around 3%/year. So, in theory, the cost of your milk, bread, and gas, has risen by about 3%/year. One asset class that historically has offered returns big enough to combat inflation, is stocks, at that 8-10% return range. Over a long-period of time, the idea is that the returns of the stock market will create more than enough return to help your dollar buy a dollar’s worth of goods in 30 years. So that’s it… that’s what the stock market is good for. It’s good for allowing a portion of your money to keep up with, and beat inflation over a long period of time. That extra return, compounded, over 30 years, should and can make you rich. That’s the reality.
Another way that I like to think about this question of, “What is the stock market good for,” is by asking another question; “What are my alternatives?” The alternatives that I can think of are cash, bonds, real-estate, or invest more in income generation or business. Which leads me to my next point.
How to Get Rich
Here’s the truth about the best way to get rich. The best way to get rich, and where most people who get rich actually do it…
Your Income. Your Ability to Earn Money.
Your income and your ability to save and make money are what will get you rich.
You should double down on your income earning potential. Think about it. Your income is one of your greatest assets. The earning potential that you have over your lifetime is amazing and it would be a shame to not maximize it.
So by maximizing your earning potential, what exactly do I mean? Start a side hustle. Work more hours to be more productive at your day job. Sell stuff. Start a business. Get more education to get a promotion. Work harder. Create something. Be diligent. Work.
Far more people will become rich through a business that they start and earn a great living from, and sell one day for a hefty profit, than by playing the markets.
Far more people will get rich from creating product that they sell to millions of customers, than investing in the next hot stock.
Your potential to earn income is one of your greatest assets and something that can actually get you rich, and hopefully in better time than stocks could… but not guaranteed… by any means.
Ask yourself what you’re good at, what you’re passionate about, and where you can bring value to people’s lives. Think about ways to help solve a problem.
I was listening to the SPI podcast by the amazing Pat Flynn, and he’s the inspiration behind me asking my son a very pointed question every single morning. I heard that Pat asks his children this, or some version of it, and it just struck me. I want to inspire my son to think about helping people and to think about creating solutions that actually help to solve problems.
Everyday, before I drop off my son at school, one of the questions that I ask him before he opens the door is, “How might you change the world today?” His response, “By helping people and solving problems.” So that’s what I’d ask you… How might YOU change the world today? How can you help people? What problems can you solve? Create a product around that or a service associated with that. Then work at it.
Should you still invest?
So, the question maybe remains… “Should you still invest?”
Look, the main point that I wanted to make with this post, is threefold:
1. ) You won’t get rich quickly with the stock market,
2.) Your best investment is YOU, and
3.) Play the long-game with investing: it’s one of the best ways to beat inflation, and it should be done with portions of your money… not all of it.
Regarding the last point, you have to keep in mind that the stock market is still one of the BEST long-term opportunities for wealth building. LONG-TERM = 30 years. But 30 years from now is still an important part of your life, right? You may be retired by then… maybe. So, would it serve you well to sock away a few hundred bucks a month now, invest it, and not touch it for 30 years? Yes! There’s a great chance you accumulate a million dollars over that time frame. So, use the stock market as a supplement to your other wealth-building tools, like your business, your side-hustle, your income, real-estate, cash, and other assets.
The stock market is still an awesome place to put a portion of your money, continue to add to, and not touch for a long time. By doing this, your odds of waking up one day with a pile of money are actually pretty good. The problem, is that people just don’t do it. They don’t get started. They quit to early. They don’t invest. They panic when the market goes down. They pull money out for an “emergency.” The real reason most people won’t get rich in the stock market, is because they won’t give it time to work.
If people only knew that time is actually their greatest asset, followed by their income, they’d know to leverage the time they have by investing and getting the most out of their second greatest asset; income.
The last point that I want to make about investing, and what many financial people won’t admit to, is that not everyone should invest. There are some scenarios where a person probably shouldn’t be investing. Those scenarios include:
- People who are already rich and can’t emotionally handle volatility. If you don’t need to get a rate of return on your money, then why risk any of it? Plenty of people invest more aggressively than they need to, and it’s negatively affecting their lives.
- People who may not be rich, but just can’t handle volatility. The market is going to go up and down, and it won’t be pretty at times. I’ve encountered many people who were losing sleep over their investments going up and down. Successful investing is very much being able to control your emotions by not getting emotionally attached to the swings in your investments. For these people, not investing needs to be the last resort. There’s plenty of educating to be done with them, along with a serious look at priorities and goals, before this person should resort to hanging up investing for good. But nonetheless, not having the stomach for it, and having investments negatively affect one’s life, are legitimate and worth looking at.
In all, remember that if you’re thinking that the stock market is a place to make you rich quickly… think again. Think about it as a place to allocate capital. Think about it as a place to put a portion of the money you earn at your job, and a place that should, over time, provide a hedge against inflation. Remember that one of your greatest assets is yourself and your earning power! Do what you can to invest in your ability to earn more money. Whether it’s a getting a raise, or starting a business, finding ways to give yourself the ability to earn more money is far more likely to pay off for you, than hitting it big on a stock trade.
Now, also remember that it would serve you very well to continue investing in the stock market with a portion of your money, and continue to do that over the next 30 years. Starting sooner than later, and socking away a few hundred dollars a month into a 401(k) or Roth IRA would serve you exceptionally well in a few decades. You just have to START! You’re greatest asset is time. You will definitely thank me later for that one.
What do you think about investing? Do you agree? Leave a comment below and I’ll respond.
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