Key Points
- The most important step when investing is choosing the right investments.
- Stocks and real estate are the best ways to invest and build wealth over time.
- The most important step to investing is starting as soon as possible.
Can investing make you rich? Well, the short answer is yes. And also no. It depends on how you approach it. You see, the word investing is a broad term used to describe the allocation of money to make a profit. However, depending on your investing strategy and goals, making a profit may not always be your reality.
1. Choose the right investments
There are various types of investments—stocks, bonds, mutual funds, index funds, ETFs, cryptocurrency, real estate, banking products such as CDs, options, alternative investments such as precious metals, and commodities.
There’s a lot to choose from, but what’s the right investment for you? Which of these investments will make you rich, or at least increase your chances of building some wealth? Let’s explore that question by examining two of the best options.
Option 1: The stock market
The stock market has given regular people the opportunity to build wealth by investing in the world’s best companies.
When you invest in companies on the stock market, you get to reap the rewards of their growth in the form of dividends and capital appreciation. And when you’re investing long-term, these rewards help increase your wealth with the help of compounding interest (the most powerful investing phenomenon).
The best way to invest in the stock market is through index funds or exchange-traded funds (ETFs). Both these investments are types of investment funds. An investment fund is a pool of money that many individual investors pay into to invest in stocks and bonds.
Investment funds are great because they take all of the guesswork out of investing in the stock market. Instead of spending hours researching and handpicking individual stocks, you can simply invest in an investment fund where the fund’s manager buys all of the stocks to either try and outperform the market or match a specific index such as the S&P 500.
Essentially, when you invest in an investment fund, you give your portfolio exposure to thousands of different stocks, all with a single investment.
Vanguard has arguably some of the best index funds on the market. You can also invest in ETFs, which, unlike index funds, can be bought and hold on the stock market.
If you want to become wealthy by investing, there are three critical steps you must take. If you can follow these three steps, you will increase your chances of investing successfully.
Option 2: Real estate
Real estate has created more millionaires than any other type of investment. It’s the reason 90% of the world’s millionaires invest in real estate.
There are many ways to invest in real estate. A couple of the most popular (and our favorite) ways of doing so are with rental properties and real estate investment trusts (REITs).
REITs allow you to invest in real estate without the time, money, and energy required to invest in physical real estate. When you purchase shares of a REIT, you are essentially investing in all of the underlying real estate that the REIT holds.
For example, Prologis is a popular REIT that has $169 billion in assets under management. When you buy shares of the Prologis REIT, you’re exposing your portfolio to all the real estate that the REIT owns.
Additionally, you can invest in an ETF that invests in a basket of REITs, such as Vanguard’s Real Estate ETF. Doing so will give you even more exposure to the real estate market than just investing in a single REIT.
Another popular way of investing in real estate is by owning rental properties. There are two major benefits to owning rental real estate. The first is the passive rental income from your tenants. Many real estate investors will save up this income and use it to finance more properties in the future. Another benefit of owning rental properties is that you own a physical piece of real estate. This comes with many additional benefits, such as the property’s value (if in the right area) will appreciating over time.
It’s important to keep in mind that investing in physical real estate requires a lot more capital at the beginning and continuous maintenance over time. This is unlike REITs which have a low entry barrier and let you begin investing in real estate for as little as $100.
2. Pick the best investment strategy
Whether you go with the stock market or real estate (or both) as your investment of choice, there’s only one way to guarantee that investing will make you rich—buying and holding over the long term.
Long-term investing ensures that your investments have enough time to grow and take advantage of the power of compound interest.
For example, let’s say you start investing in the stock market when you’re 35. You decide to invest in VOO, which is Vanguard S&P 500 ETF. This ETF has an average lifetime return of about 16%, but just to be extra conservative, let’s say it returns 10% annually on average.
Over the next 30 years, you invest just $200 per month into this ETF with a 10% return. By the time you hit 65, your investment would have grown to $394,785.65.
There are many investment strategies out there. It may be tempting to go with a strategy that promises higher returns in a short time, but these strategies tend to be much riskier.
“Buy low, sell high” is what they say. But what they don’t tell you is that it’s nearly impossible to time the market. That’s why Warren Buffett suggests taking a more backseat approach to investing in the stock market. Buy index funds and hold long-term. By doing this, even the average investor can outperform top hedge funds and money managers.
3. Start investing now
My grandmother is 77. She approached me not too long ago and said, “Joshua, I heard you know a little something about investing. Can you help me get started?”
There’s nothing wrong with getting started late. Some may argue that it’s never too late to start anything—and generally, I agree with this. But there are exceptions, especially if there are other variables at play.
For example, my grandmother is 77 and wants to retire when she is 80. This means she would only have three years to invest in the stock market and let her money grow. That’s simply not enough time.
First of all, to really experience the generational benefits of investing in the stock market, you need to spend a couple of decades investing and consistently adding more and more money every year.
Second, three years is not enough time because what if, in the second year of investing, we experience a crash or correction? Although one can never predict how quickly the market will recover, it’s better to invest for a minimum of five years as a rule of thumb.
At the end of the day, it doesn’t matter which investment strategy you choose or which investments are in your portfolio. If you begin investing too late, then you will never be rich.
Start as soon as possible. When it comes to building wealth, time is your biggest asset.
Learn more:
- Want more stock investing guidance? Read our guide on how to invest in stocks.
- Want some advice on investing? Read our post on the best ways to invest according to millionaires and billionaires.
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