Want To Learn How To Grow wealth?
You don’t need thousands of dollars in your brokerage account and you don’t have to become a Day Trader, you only need to start.
Preparation Is: Smart, Required, & Logical
Reading, learning, & keeping an open mind are all things a trader must never quit doing. These Principals applies to all trades and careers — It’s a universal fact .
Yet, once you understand how to do something well enough that you can start taking on tasks without constant help or refrences, you need to start applying the skill in the real world. You’ll learn the rest as you go — It’s a universal truth.
If you keep letting the fear that you’re “not yet ready” control you, eventually your progress will become redundant, then redundnce becomes procrastination, finally turning into resentment, which then leads to the inevitable failure.
Now you’re paralized in the research phase, stagnant, never taking action. — It’s a universal pattern.
The best place to learn how to do something is in the field, not hearing about it from others when they come back to the base — It’s the only way I know how to break the pattern and become productive.
Overpreparation To The Point of Inaction
Preparation and research are two habits that we have to be consistent with if we choose to become investors. Knowing accurate information about what’s going on in the market, tends to help me more than any indicator on my chart does, once the opening bell rings at 9:30 am PST.
Indicators are great for getting a feel for the overall market like which way it’s trending and the sentiment of the buyers and sellers. Tools like LvL 2 Market Data (The NASDAQ Order Book), Simple Moving Averages (SMA), and the Relative Strength Index (RSI) are great for getting a feel for the direction a stock’s price is likely to trend.
Although, when using indicators, there’s a flaw that comes with them that you’re exposed to. The issue stems from the timeframe constraints they operate under. The shorter the timeframe on the indicator you’re using, the less reliable the buy/sell signals you receive are.
A very simple way to understand this is to look at Moving Averages. A 200 Day SMA is going to be much more reliable than a 10 Day SMA. The reason this happens is that with the 10 Day MA, the stock’s price is constantly updating with fresh data.
It does this so frequently, and since you only have 10 days of data to work with, they tend to give false Buy/Sell signals from time to time.
Information on the other hand is real-time, true to the minute. Well, as long as you’re prepared it is, then there’s the gap in resources that we as retail traders lack over the institutional kind. Precious inside knowledge that only a handful of people are privy to at any given moment.
Sure, it’ll become public knowledge eventually, but they’ll always be a step ahead of us.
Insider Trading is illegal and I’m not making an accusation that all of the Brokers on Wall Street are engaging in said illegal behaviors. But still. . .
Besides flat out illegal insider trading, you still have CEO’s and well-placed people within an organization, with access to vast resources and knowledge about future economic events
This is all beside the point though. I have strayed off on a side rant, again. I really need to work on that.
All the things mentioned above are what I consider the building blocks of what a good investor needs to learn. No matter what type of investing you intend to do later on as you progress, all of those skills will serve you well.
With that, let's move on to a simple, straightforward style of investing that anyone can accomplish.
The Power of Compound Interest
One thing I’ve learned (through a lot of trial and error) is that there’s no one ‘thing’, whatever that thing happens to be, that’s going to make you some stock market visionary overnight. Actually, I lied, there is one thing that will basically guarantee you success over the long run.
It’s a revolutionary concept called compound interest.
- To illustrate how compounding works, suppose $10,000 is held in an account that pays 5% interest annually.
- After the first year or compounding period, the total in the account has risen to $10,500, a simple reflection of $500 in interest being added to the $10,000 principal.
- In year two, the account realizes 5% growth on both the original principal and the $500 of first-year interest, resulting in a second-year gain of $525 and a balance of $11,025.
- After 10 years, assuming no withdrawals and a steady 5% interest rate, the account would grow to $16,288.95.
This simply means that the sooner you’re invested, the sooner you’re making interest and profit from that investment. Then, as your earning interest and profit from your original investment, (starting capital), you have a larger cash pile, meaning that the interest earned and profit made gets bigger and bigger constantly.
This rate of growth really starts to take off right around the ten-year mark. So, what you need to take from that jumbled mess of a paragraph above is:
Get your money invested into some, now. You don’t have to learn how to Day Trade first, or learn all of the indicators and be actively managing your assets every day.
No, just go and invest like $100 into an S&P 500 Index Fund. Do this as soon as you can, then never touch it again. If you want to learn how to swing trade and perhaps even day trade on the side, that’s perfectly okay.
You should always seek to improve yourself and your situation, who can knock someone for wanting that?
The important thing is that you have that backup money sitting in a broad index fund, with virtually no fees and very little risk, growing and compounding every year.
The S&P 500 Index Fund gains on average about 10% per year. That’s far better than some Bank of America savings account, or losing it all by buying an Altcoin that you know nothing about.
This should be the mantra of every new investor who is still under the age of 30: Year after year, the profits and interest (assuming you’re reinvesting it and keeping your money in the market) will continue to grow, faster and larger each year.
That my friends is the power of compound interest. They even have tools for lazy people like me who don’t feel like doing the simple math to figure out what the rate of return, (ROI), would be on an investment over a certain time period.
Here’s a short video to explain exactly how to use a compound interest calculator
The problem with compound interest is that if you wait too long to start investing, (tutorial purgatory), you’ll be shocked by the ramifications it has on long-term compound interest.
The difference between a 20-year-old and a 30-year-old, both investing into the same asset, with the same amount of money, is staggering. Once you go past 30, it gets even worse.
Honestly, it downright scary to think about.
Here is a free Compound Interest Calculator tool you can use to create and tweak your own idea of what you can invest, starting whenever you're able to.
The Rule of 72.
The rule of 72 is a simple, fast way to determine how long an investment will take to double given a fixed yearly interest rate. Or, instead of using the word interest, (considering that it sounds more like a bank account rate than investment returns), let me rephrase it: “Given a fixed rate of return on your investment.”
How does it work?
By dividing 72 by the yearly return rate of your investment, you can obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.
Here’s another short video to explain the rule of 72. I know that for me, I learned way faster with visuals rather than text.
How do you know what number to use when making these calculations?
Good question. It’s not a 100% full-proof way, but you can just take the averages of the major indexes and use those as your base annual rate of return.
These are the annualized average returns of the benchmark indexes for 10 years, ending June 30, 2019:
- S&P 500:14.70%
- Dow Jones Industrial Average: 15.03%
- Russell 2000: 13.45%
- MSCI EAFE: 6.90%
For 20 years, ending on the same date, June 30, 2019:
- S&P 500: 5.90%
- Dow Jones Industrial Average: 7.03%
- Russell 2000: 7.70%
- MSCI EAFE: 4.00%
Source for the annual rates of return for the indexes.
Investing doesn’t always have to be some hard, difficult process that takes up all the spare tie you have in life. You also don’t need a Finance Degree to pick a good, broad market Index Fund and stash some money away in there as often as you’re able to.
Many middle-class people have 401(k) plans at their jobs. The lucky ones have 401(k) plans in which their employer matches contributions up to a certain percent, usually up to 20% on the high end.
Imagine if every time you put $100 into an Index Fund that some person threw another $20 in for you. Also imagine that you’re reading this article right now, at the ripe age of 23 or 24.
Keep putting money away like that until you retire and you’ll live out the remaining few years you have left in comfort. But, should you wait until you’re 30, or 35, well. . .
I’m just kidding, you should still do it and be happy that you started when you did. I know some people who are either just starting or still haven’t, and they're well into their 40s!
Even if you find yourself in a position like that, you should still start investing and letting the magic of compound interest do the leg work for you. But you should definitely try to start ASAP.
That’s about it. Nothing too fancy about this article. Just some good ole boring Warren Buffett-style investment advice for ya.
Have a great day, and remember, start saving soon! No, seriously, I mean like right now.
Click out of your browser and check how much money you have to work with inside your checking account. Then open a Robinhood account or something and buy the first Index Fund you see. . .
You’ll turn out better than half of America if you actually did that.