“One of the best ways to build wealth over time is to invest!” The Motley Fool
The stock market is a fantastic tool to build wealth. If you don’t have much money to spare, The Motley Fool video below explains how to start investing with just $100 or less.
Good investing has little to do with how smart you are and a lot to do with how long you stay invested for.
— The Motley Fool (@themotleyfool) March 7, 2021
Investing is a marathon and learning how investing in stocks can help you accumulate wealth is important to your financial
Long-term investing is a marathon and is the best way, by far, to build wealth that stands the test of time. It’s how you plan for financial freedom, retirement and build a legacy to pass on to your children and grandchildren. Long-term investments require patience and time measured in decades, but have the potential to pay off with high returns.
Investing is the act of purchasing assets – such as stocks or bonds or real estate – in order to move money from the present to the future. However, the conversion of present cash into future cash is burdened by the following problems:
To overcome these problems, investors must be compensated appropriately. This compensation comes in the form of an interest rate, which is determined by a combination of the asset’s risk and liquidity and the expected inflation rate.
The steps to investing and building wealth involve a series of small decisions that move you along a financial path, one building block at a time over a long period of time. The steps begin with believing that attaining wealth is possible, and a clear intention to start investing and attaining wealth. After all, making your money work for you and accumulating wealth is not a haphazard occurrence, but a deliberate process, journey and destination.
Once you determine that investing and attaining wealth is a priority, focus your energies on maximizing your income, and saving a portion of it. Investing and building wealth also requires you to make decisions on avoiding potentially destructive forces that erode wealth, such as inflation, taxes and overspending.
Learning to be mindful of where your money has been going and spending wisely by evaluating whether something is a need or just a want will keep more money in your pocket. The bonus from being mindful will help you stop accumulating more stuff and may teach you to repurpose already owned items.
“Successful investing and building wealth are about discipline, understanding of your tolerance for risk and, most importantly, about setting realistic financial goals and expectations about market returns,” says Certified Financial Planner Melissa Einberg, a wealth adviser at Forteris Wealth Management.
Invest in stocks.
Your first thought regarding investing in stocks and bonds may be that you don’t want to take the risk. Market downturns definitely happen, but being too cautious can also put you at a disadvantage.
Stocks are an important part of any portfolio because of their long term potential for growth and higher potential returns versus other investments like cash or bonds. For example, from 1926 to 2019, a dollar kept in cash investments would only be worth $22 today; that same dollar invested in small-cap stocks would be worth $25,688 today.
Stocks can serve as a cornerstone for most portfolios because of their potential for growth. But remember – you need to balance reward with risk. Generally, stocks with higher potential return come with a higher level of risk. Investing in equities involves risks. The value of your shares will fluctuate, and you may lose principal.
Investing a portion of your savings in stocks may help you reach financial goals with the caveat that money you think you’ll need in three to five years should be in less risky investments. Stock investing should be long-term, understanding your risk tolerance, and how much risk you can afford to take.
The power of compounding
Compound interest is what can help you make it to the finish line. Compounding can work to your advantage as a long-term investor. When you reinvest dividends or capital gains, you can earn future returns on that money in addition to the original amount invested.
Let’s say you purchase $10,000 worth of stock. In the first year, your investment appreciates by 5%, or a gain of $500. If you simply collected the $500 in profit each year for 20 years, you would have accumulated an additional $10,000. However, by allowing your profits to stay invested, a 5% annualized return would grow to $26,533 after 20 years due to the power of compounding.
Purchasing power protection
Inflation reduces how much you can buy because the cost of goods and services rises over time. Stocks offer two key weapons in the battle against inflation: growth of principal and rising income. Stocks that increase their dividends on a regular basis give you a pay raise to help balance the higher costs of living over time.
In addition, stocks that provide growing dividends have historically provided a much greater total return to shareholders, as shown below.
Invest for the long term.
Long-term investing is the practice of buying and holding assets for a period of five to ten years or longer. While investing with a long-term view sounds simple enough, sticking to this principle requires discipline. You should buy investments with the intention of owning them through good and bad markets. You should base your investment guidance on a long-term view. For your stock picks, you should typically use a five – to ten-year outlook or longer.
Long-term investments require patience on your part which is a trade-off for potentially lower risk and/or a higher possible return.
Market declines can be unnerving. But bull markets historically have lasted much longer and have provided positive returns that offset the declines. Also, market declines often represent a good opportunity to invest. Strategies such as dollar cost averaging and dividend reinvestment can help take the emotion out of your investing decisions.
No one can or has accurately “time” the market. An investor who missed the 10 best days of the market experienced significantly lower returns than someone who stayed invested during the entire period, including periods of market volatility and corrections. Staying invested with a strategy that aligns with your financial goals is a proven course of action.
Take a closer look at why we recommend staying invested long-term, with a strategy that aligns with your financial goals. https://t.co/HT8CZyTGxk pic.twitter.com/FgV4FaBS94
— Edward Jones (@EdwardJones) December 21, 2020
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Source: Schwab Center for Financial Research. The data points above illustrate the growth in value of $1.00 invested in various financial instruments on 12/31/1925 through 12/31/2019. Results assume reinvestment of dividends and capital gains; and no taxes or transaction costs. Source for return information: Morningstar, Inc.
“Wealth is a safety net that keeps a life from being derailed by temporary setbacks and the loss of income.” Brookings Institute
The wealth gap for African Americans remains significant. A close examination of wealth in the U.S. finds evidence of persistent and staggering racial disparities and past racist federal policies, according to the Brookings Institute findings. Specifically, the disparities include:
This disparity means that Black Americans will have less money saved and invested for retirement, and less accumulated wealth to pass onto the next generation than their white peers.
Figure 1. White families have more wealth than Black, Hispanic, and other or multiple race families in the 2019 SCF.
Notes: Figures displays median (top panel) and mean (bottom panel) wealth by race and ethnicity, expressed in thousands of 2019 dollars.
These gaps in wealth and investments between Black and White households reveal the effects of centuries’ of accumulated inequality, discrimination and racism, as well as differences in power and opportunity that can be traced back to this nation’s inception. The Black-White wealth gap reflects a society that has not and does not afford equality of opportunity to all its citizens.
It is important to note that it was never the case that a White asset-based middle class simply emerged, according to research based on a study of historical and contemporary racial inequality. Rather, it was extraordinary government policy, and to some extent literal government giveaways, that provided Whites the financial assets, educational opportunities, land grants and infrastructure to accumulate and pass down wealth.
In contrast, blacks were largely excluded from these wealth generating benefits. When they were able to accumulate land and enterprise, it was often stolen, destroyed or seized by government complicit in theft, fraud and terror.
Federally funded racism in housing and labor unions
In the mid-twentieth century, the government subsidized builders to construct suburbs of single-family homes in scores of developments across the country on explicit federal condition that no homes be occupied by African Americans, according to the NAACP Legal Defense Fund. Over several generations, federally subsidized white homebuyers gained a quarter million dollars in home equity or more. In contrast, the government restricted African Americans, including war veterans, mostly to segregated urban apartment rentals where no wealth appreciated.
White homeowners were able to bequeath some of this federally subsidized wealth to subsequent generations, after using it for retirements, children’s college education, care for elderly parents, or medical emergencies. African Americans had to use current income for such expenses, if they could do so at all, pushing many into poverty. Largely because of twentieth century federal segregation policy, while average African American income is about 60 percent of white income, African American wealth is only 7 percent of white wealth.
Other federal policies forced African Americans into poverty, continuing for generations. In 1935, the government gave construction and factory unions the right to collectively bargain for higher wages and benefits. As proposed by Senator Robert Wagner, the law denied that right to unions that barred African Americans. Segregated unions lobbied to remove that provision and the Wagner Act was then passed, unconstitutionally empowering unions to exclude black workers — a policy that continued for over 30 years. Denied the best blue-collar employment, African Americans participated less in the collectively bargained income boom that raised white working class incomes in the three decades following World War II.
Wealth
“Black children are less economically upwardly mobile partly because of the multigenerational effects of federal and state government racist policies that purposely segregated their grandparents and great-grandparents into low-income communities and low paying jobs from which exit was difficult.”
Wealth is the sum of resources available to a household at a point in time; as such it is clearly influenced by the income of a household, but the two are not perfectly correlated.
Two households can have the same income, but the household with fewer expenses, or with more accumulated wealth from past income or inheritances, will have more wealth.
As a result, high- and middle-income white families are much wealthier than Black families with the same incomes. A few reasons are that White families receive much larger inheritances on average than Black families. Economists Darrick Hamilton and Sandy Darity conclude that inheritances and other intergenerational transfers “account for more of the racial wealth gap than any other demographic and socioeconomic indicators.”
For example, while 51 percent of white Americans say they have inherited wealth, just 23 percent of Black Americans have, according to an annual Ariel-Schwab Black Investor Survey.
All of this matters because wealth confers benefits that go beyond those that come with family income.
Wealth is a safety net that keeps a life from being derailed by temporary personal economic setbacks and the loss of income, according to Brookings Institute. This safety net allows people to take career risks knowing that they have a buffer when success is not immediately achieved.
Family wealth allows people (especially young adults who have recently entered the labor force) to access housing in safe neighborhoods with good schools, thereby enhancing the prospects of their own children.
Wealth affords people opportunities to be entrepreneurs and inventors. And the income from wealth is taxed at much lower rates than income from work, which means that wealth begets more wealth.
Education a Way to Weslth
Social science research indicates that blacks attain more years of education than whites from families with comparable resources. Essentially, blacks place a high premium on education as a means of mobility
Yet, the racial wealth gap between Blacks and Whited expands at higher levels of post secondary education. In short, Black families where the head graduated from college have less accumulated than wealth than white families where the head dropped out of high school.
One take-away…better mindsets regarding wealth and money alone can’t fix the legacy of unconstitutional and racist federal and state sanctioned economic policy.
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Imagine operating a boat without the basic understanding of nautical rules of the road or even how to operate a boat. Scary thought.
Here’s another scary circumstance – one that is all too real. Many Americans are making financial decisions with minimal financial knowledge of investing, budgeting, and credit. The TIAA Institute conducted a survey on U.S. financial literacy, asking 28 basic questions about retirement saving, debt management, budgeting, and other financial matters. The average respondent answered only about half of the questions correctly.
Another study, conducted by Pew Research, found that one in four Americans say that they won’t be able to pay their bills on time this month.
It has been said that knowledge is power, and if that’s true, then too many Americans lack the power to control their financial futures. Financial success rarely happens by accident; it is typically the outcome of a journey that starts with education.
Talking about money is one of the most important skills to being a fiscally responsible and a financially literate person. However, 44% of Americans surveyed would rather discuss death, religion or politics than talk about personal finance with a loved one, according to CNBC.
Why? Two major reasons are embarrassment and fear of conflict, even though the consequences can be grave: 50% of first marriages end in divorce, and financial conflict is often a key contributor. Additionally, it is considered rude to discuss money and wealth.
The missing component is financial literacy education and training.
Mastering personal finance requires you to look at your financial situation holistically and come up with a plan for how to manage your money. In this TD Ameritrade video, we’ll look at helpful principles for six personal finance topics:
Make high impact adjustments to your finances to improve your financial future.
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The process of calculating personal net worth may well be the only exercise in financial planning that savers and investors actually enjoy. It, with a personal cash flow statement, provides savers and investors with a financial scorecard of where you stand along the path of financial security.
“A personal income and expense statement [cash flow] goes hand-in-hand with a net worth statement because it allows you to see sources of income and expenses while working and retired,” David Bizé, a financial professional in Oklahoma City, Oklahoma, said. “It helps you determine how much can reasonably be saved for financial goals as well as project whether your financial goals will be satisfied long term.”
Calculate your net worth
A net worth statement is a list of what you own (assets) and what you owe (liabilities).
Your assets would include any possessions of value, including:
To estimate the value of the personal property in your home, a good rule of thumb is to use 25 percent to 30 percent of its fair market value.
Income is an important part of personal finance. But net worth might deserve more of your attention: http://t.co/VKOflMn20N
— Two Cents (@TwoCentsLH) September 10, 2014
Into the liability column falls any debt you may have, such as:
To calculate your net worth, simply subtract what you owe from what you own. If you own more than you owe, your net worth will be positive. If you owe more than you own, it’s negative.
Appearances can be deceiving, the numbers never lie. Your neighbor with the big house and the luxury cars, for example, may exude a high net worth lifestyle, but if they’re up to their nose in debt, or not saving for their retirement, they may have a smaller net worth than the family next door who lives more modestly.
As a rule of thumb, your net worth should be roughly equal to six times your annual salary by age 60, or that your net worth by age 72 (the new age at which required minimum distributions from your IRA must begin) should be 20 times your annual spending. Other financial pundits suggest that you should aim to be net worth positive by age 30, and have twice your yearly salary socked away for retirement by age 40.
According to the U.S. Federal Reserve, the average net worth of all families in the U.S. rose 26 percent to $692,100 between 2013 and 2016, the most recent year for which data are available. But the average net worth by age group breaks down as such:
The ideal net worth differs for everyone and depends on your lifestyle, geographic location, income potential, and investment returns. The age at which you plan to retire also plays a role. The longer you work beyond your full retirement age, the less you need saved.
At the end of the day, all that matters is that your net worth is appropriate for your future financial plans, your financial goals and your lifestyle.
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Successful investing for the long term and accumulating wealth are about owning a portion of a successful business. It is the single best way to accumulate wealth.
It is extremely difficult for individuals to accumulate wealth by earning income and slugging their way through a 9 to 5 job. It’s very hard to get truly wealthy by renting out your time. Bottomline…you can only work so many hours.
Even high earners like corporate executives, doctors and lawyers don’t typically earn millions of dollars a year. Instead, the path to amassing vast fortunes is paved by owning assets like stocks of a successful business and allowing the assets to to appreciate in value and work for you.
The single greatest wealth-building secret on the planet and the path to amassing vast fortunes is paved by owning a successful business through investing for the long term in stocks. Controlling vast sums of stock market wealth is a common thread among the world’s wealthy.
That doesn’t mean you have to create and build the next Tesla, Amazon or Walmart. You can “piggyback” on billionaire CEOs like Bezos by buying shares of their companies on the stock market. This is the playbook many wealthy folks follow.
Recent data from investment bank Goldman Sachs shows the wealthiest 1% of US households own more than half the stocks in America. At the end of 2019, they controlled $21 trillion in stock market wealth.
Over long term, ownership of companies through stocks have outperformed bonds and most other asset classes. This makes sense when you think about it. Stocks are riskier than bonds, so you expect to earn a higher return on capital.
When you save for the future by paying yourself first and invest for the long term your capital in a successful business, you accumulate assets that earn money while you sleep. For example, by owning Amazon shares, every time the stock soars, your net worth increases.
When Amazon crushes earnings, you win, too. Think of it as a second income that often brings in more than your main job.
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“We’re in the midst of a national reckoning on race, and words are not enough. We need awareness, education and action that drive results.” Mark Mason, Chief Financial Officer of Citigroup
Citigroup research found that if the U.S. could instantly end the most severe forms of economic discrimination against African Americans, it could give the economy a $5 trillion boost to gross domestic product (GDP) over the next five years.
Racial inequalities shaved about $16 trillion from U.S. GDP
During the past 20 years, race-based inequalities shaved about $16 trillion from GDP, Citigroup estimated in a CLOSING THE RACIAL INEQUALITY GAPS: The Economic Cost of Black Inequality in the U.S. study. Citigroup said it “studied the costs of lost wages, fewer opportunities for higher education and less access to home and small-business loans” for African Americans.
“What this report underscores is that this tariff is levied on us all and, particularly in the U.S., that cost has a real and tangible impact on our country’s economic output,” Citigroup Vice Chairman Raymond J. McGuire said in the report. “We have a responsibility and an opportunity to confront this longstanding societal ill.”
Furthermore, today in the midst of the COVID-19 pandemic, Black, Latin, and Native Americans have been hospitalized for COVID-19 at a disproportionately high rate, a direct result of what the Centers for Disease Control and Prevention has identified as “long-standing systemic health and social inequities.” Blacks and People of Color are also bearing a disproportionate share of the pandemic’s economic devastation.
Citigroup believes that they, as a major U.S. financial institution, “have a responsibility to address complex societal questions” and “to address current events and to frame them with an economic lens in order to highlight the real costs of longstanding discrimination against minority groups, especially against Black people and particularly in the U.S.”
Four key racial gaps for Blacks
The analysis in the report shows that if four key racial gaps for Blacks —wages, education, housing, and investment — were closed 20 years ago, $16 trillion
could have been added to the U.S. economy. And if the gaps are closed today, $5 trillion can be added to U.S. GDP over the next five years. The Citi study assessed that:
Closing the wage, housing, education, and business investment racial gaps can help narrow the wealth gap, which is significant for facilitating homeownership, business, and job creation, plus establishing a pipeline for intergenerational wealth accumulation.
It’s hoped that Citigroup’s study brings perspective that collectively Americans can find substantive and sustainable opportunities to address the racial inequality gaps identified in the research.
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Dividends have produced forty percent (40%) of market returns.
The Ten Steps to Financial Freedom, according to Kevin O’Leary, Chairman of O’Shares ETF, and better know as “Mr. Wonderful”, are::
https://youtu.be/HsUQoEOu_bE
Top 10% of Americans by wealth own 87% of all U.S. equity stocks
The top 10% of Americans by wealth owned 87% of all stock outstanding in the first quarter, according to research from the Federal Reserve. That share has grown over the past decade, from 82.4% in 2009. Fed researchers say the increase in wealth among the top 10% is largely a result of that cohort obtaining a larger concentration of assets. These increases were mirrored by decreases for households in the 50-90th percentiles of the wealth distribution,” Fed researchers said.
The percentage of Americans who own stock, either directly or through retirement or mutual funds, is falling. It most recently stood at about 55%, according to an April Gallup poll, down from a high of 67% in 2002.
“The middle class has essentially been left out of the stock market surge,” said Edward Wolff, an economics professor at New York University. “The rich have taken off from the rest of society.”
S&P 500 and NASDAQ indexes have closed at all time highs
The S&P 500 and NASDAQ have soared to a new high, wiping out its losses since the worst of the coronavirus-induced downturn in March. Stocks continue to shrug off historic unemployment rates and other economic warning signs.
The S&P 500, the benchmark U.S. stock index, has surged more than 50% since bottoming in March and is back at record levels, largely thanks to the unprecedented stimulus programs enacted by the Federal Reserve and Congress.
Although the stock market has erased its losses suffered during the pandemic, the economy appears to be telling a different story. It contracted at the sharpest rate on record in the second quarter, and the unemployment rate remained above 10% in July, after reaching nearly 15% in April.
The current disconnect between the stock market and the economy is extremely unusual. The economy is not confirming the stock market’s strength. The stock market has surged since March 2020 lows, with the S&P 500 and NASDAQ indexes eclipsing all time highs in August 2020.
FOMC acknowledged that after the initial surge in job losses and plunge in economic activity, things have started to improve. According to the statement, “Following sharp declines, economic activity and employment have picked up somewhat in recent months but remain well below their levels at the beginning of the year.”
Updated: September 2, 2020
The stock market has been the primary reason for the diverging wealth gap. The logical solution is to get more Americans invested in the stock market.
According to Forbes, nine out of every 10 households with incomes over $100,000 own stocks. But sadly, most American’s don’t have any personal capital invested in stocks. Only 20% of households earning less than $40,000 own stocks. And research from the National Bureau of Economic Research shows almost two-thirds of investors have less than $10,000 in the stock market.
Fifty-five percent (55%) of Americans report that they participate in the stock market (own stocks), according to Gallop.
Furthermore, Gallup finds “relatively few Americans in lower-income households invested in stocks” and only 55% of Americans reported that they own stock, based on polls conducted in March and April of 2020. This is identical to the average 55% recorded in 2019 and similar to the average of 54% Gallup has measured since 2010.
In other words, the stock market’s exponential rise over the past decade has not helped most American families. In fact, “fewer Americans are benefiting from today’s bull market than did so in bull markets before the financial crisis.
The gains in stock values in recent years seem to have done little to persuade people who may have divested themselves of stocks to get back in the market” according to Gallup’s research. In fact, a recent survey by Betterment highlights this great misfortune. When asked how the stock market performed over the past decade, roughly half of those surveyed said the market had gone nowhere. Worse yet, a further 20% said they thought it fell!
Eighty-four percent (84%) of all stocks owned by Americans belong to the wealthiest 10 percent of households, according to NYU economist Edward N. Wolff.
The number of Americans who own stocks has plunged since 2000. But after a relentless 20-year decline, this trend is reversing. Thanks to commission-free trading led by Robinhood, all the major brokerages have seen millions of new investors flood into the market in 2020.
In short, millions of new investors are getting into stocks for the first time. And it’s a wonderful thing.
You will never accumulate wealth “Renting Out Your Time”
Working hard and saving money is necessary. But it’s often not sufficient. Ramit Sethi wisely points out in I Will Teach You To Be Rich:
“Because of inflation, you’re actually losing money every day your money is sitting in a bank account.”
Additionally, Robert Kiyosaki of Rich Dad, Poor Dad likes to say that:
“The rich get richer by continually reinvesting asset profits back into assets.”
Thus, as you may see, it is extremely important to make your money work for you. But, it appears that most people don’t know how to make their money work for them. But if you want to build massive wealth, you need to put your dollars to work.
And, you can put your dollars to work by owning a piece of a successful business—owning stocks—that is the main path to accumulating wealth that’s available to anybody.
It’s okay if you only have a little money to get started. These days it’s totally free to buy stocks through most big brokerages. And you can usually open an account with as little as $100.
Start by investing in a market index fund 🙂
The important thing regarding investing is to overcome the fear and break the inertia, and start investing. No more excuses. If you’re just getting started investing, first it is recommended that you buy a market index fund such as a S&P 500 Index mutual fund or exchange traded fund that owns a list of U.S. large cap stocks. That way you’ll own tiny fraction of hundreds of businesses.
An index is a list of companies…so when you buy S&P 500 index mutual fund or exchanged traded fund, you are buying an index that tracks the S&P 500. In fact, buying fund that tracks a market index is one of the best ways for beginner investors to get their feet wet in the stock market.
The S&P 500 is a stock market index that measures the performance of about 500 companies in the U.S. It includes companies across 11 sectors to offer a picture of the health of the U.S. stock market and the broader economy. This stock market index is viewed as a measure of how well the stock market is performing overall.
Additionally, index funds continue to outperform the vast majority of the actively managed funds in their asset classes. In the 15 calendar years ended last Dec. 31, the S&P 500 Index outperformed 90.5% of all actively managed U.S. large-cap funds, according to analysts at S&P. Among 13 specific asset classes, the percent of funds that under-performed their benchmark indexes were similar, ranging from a low of 81.4% for large-cap value funds to a high of 95.2% for mid-cap blend funds.
Focus on Asset Classes
Investors are increasingly focused on asset classes instead of individual stocks. The reasons are that asset classes are much less risky than individual stocks, without sacrificing anything in terms of expected return.
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