Content of the material
- How to Invest
- 3. Use Index Funds
- Sell Short
- 2. The Contrarian Way—Blood in the Streets
- 3. Trade commodities
- Use Market Data to Guide Your Decisions
- Can an Investor Use All Five Ways in the Quest to Double Ones Money?
- An Example: Investing $10,000 in 1986
- The Time Value of Money
- 6. Contribute to Your Portfolio Consistently
- Earn Compound Interest
- Join Us
- How to stay rich
- 1. Live below your means
- 2. Diversify your income streams
- 7. Flip real estate contracts
How to InvestBy
MarketWatch Contributor Networkcomments
3. Use Index Funds
Picking one stock that is going to make you rich is a bit unrealistic. That’s why index fund investing is so popular.
When you invest in an index fund you are broadly diversified. By investing in many different companies in one fund, your investment in each fund is automatically smaller. This means you earn less from each company. But that way also, should some of the companies turn out to be lemons, you don’t lose as much money.
Rather than seeking the one stock that will change your life forever, index fund investing is good for the buy-and-hold strategy and getting rich in the stock market over time.
A short seller essentially bets that a stock’s price will fall. Technically, a short seller borrows shares of stock, sells them, then buys them back and returns them to the lender. If the stock price has fallen in between these two transactions, the short seller turns a profit. But if the stock instead rises, then the short seller loses. In many ways, short selling is like day trading, meaning it’s a quite aggressive strategy. As the long-term trend of the market is strongly up, a short seller must have a compelling reason for believing that a specific stock or index will fall. Macroeconomic factors, an overvalued stock price or a deteriorating business are all reasons that might cause a stock to fall, but they are not guarantees. In a booming market, even stocks that are “overvalued” or unprofitable may continue to rise. Like day trading, short selling can be profitable, but it takes a very astute or professional trader to do so.
2. The Contrarian Way—Blood in the Streets
Even the most unadventurous investor knows that there comes a time when you must buy, not because everyone is getting in on a good thing but because everyone is getting out.
Just as great athletes go through slumps when many fans turn their backs, the stock prices of otherwise great companies occasionally go through slumps, which accelerate as fickle investors bail out. As Baron Rothschild supposedly once said, smart investors "buy when there is blood in the streets, even if the blood is their own."
Nobody is arguing that you should buy garbage stocks. The point is that there are times when good investments become oversold, which presents a buying opportunity for investors who have done their homework.
Valuation metrics used to gauge whether a stock may be oversold include a company’s price-to-earnings ratio and book value. Both measures have well-established historical norms for both the broad markets and for specific industries. When companies slip well below these historical averages for superficial or systemic reasons, smart investors smell an opportunity to double their money.
Being contrarian means that one is going against the prevailing trend. It therefore requires a greater degree of risk tolerance and a substantial amount of due diligence and research. As such, a contrarian strategy is best left to very experienced investors and is not recommended for a conservative or inexperienced investor.
3. Trade commodities
Trading commodities like gold and silver present a rare opportunity, especially when they’re trading at the lower end of their five-year range. Metrics like that give a strong indication of where commodities might be heading. Carolyn Boroden of Fibonacci Queen says, “I have long-term support and timing in the silver markets because silver is a solid hedge on inflation. Plus, commodities like silver are tangible assets that people can hold onto.”
The fundamentals of economics drive the price of commodities. As supply dips, demand increases and prices rise. Any disruption to a supply chain has a severe impact on prices. For example, a health scare to livestock can significantly alter prices as scarcity reins free. However, livestock and meat are just one form of commodities.
Metals, energy and agriculture are other types of commodities. To invest, you can use an exchange like the London Metal Exchange or the Chicago Mercantile Exchange, as well as many others. Often, investing in commodities means investing in futures contracts. Effectively, that’s a pre-arranged agreement to buy a specific quantity at a specific price in the future. These are leveraged contracts, providing both big upside and a potential for large downside, so exercise caution.
Use Market Data to Guide Your Decisions
Market data refers to the price, bid/ask quotes, dividend per share (if applicable), market volume, and other market information. There is historical data as well as real-time data.
Whether you are more of a fundamental or analytical investor, this data is valuable. Data-driven decisions prevent impulsive and emotional purchases.
You can find some of these data points within your stock trading platform or on stock and investment websites.
Additionally, commonly-available information to you in most online brokerage accounts will show you the current share price, the 52-week range, market capitalization, volume, and more.
Can an Investor Use All Five Ways in the Quest to Double Ones Money?
Yes, of course. If your employer matches contributions to your retirement plan, take advantage of that perk. Invest in a diversified portfolio of stocks and bonds and consider being a contrarian when the market plunges or rockets higher. If you have the risk appetite and want some sizzle on your steak, allocate a small portion of your portfolio to more aggressive strategies and investments (after doing your research and due diligence, of course). Save on a regular basis to buy a house and keep the down payment in a savings account or other relatively risk-free investment.
An Example: Investing $10,000 in 1986
What if someone wasn't lucky or skilled enough to spot Microsoft? The good news is that great businesses, especially boring ones, can be great investments. They don't all have to be Microsoft to be worth your while.
Let's go back to that same day in 1986. Suppose that instead of buying Microsoft, you decided to divide your $10,000 portfolio into two piles.
From one pile, worth $5,000, you pick up shares of five of the bluest blue chips in the United States. They’re companies that everybody knows. They have strong balance sheets and income statements. They’ve long been part of the index, they’re household names, they’ve been in business for decades, and they pay dividends.
You select a random list based on the darlings of the day: McDonald's Corporation, Johnson & Johnson, Hershey, Coca-Cola, and Clorox.
You use the other pile, also worth $5,000, to speculate on high-risk penny stocks. You choose these yourself. You think they have huge payout potential. You promptly lose that $5,000.
You're sitting on an awful 50% loss of principal from day one. You're left with the so-called "grandma stocks." How did you fare? Did these boring names that promise a complete lack of sex appeal or nightly news stories let you down? Hardly! The chart below shows your total return on investment from 1986 to 2014.
- Your $1,000 in Hershey grew to $24,525.92, of which $20,427.75 was stock, and $4,098.17 was cash dividends.
- Your $1,000 in Coca-Cola grew to $25,562.42, of which $19,574.04 was stock, and $5,988.38 was cash dividends.
- Your $1,000 in Clorox grew to $20,668.60, of which $16,088.36 was stock, and $4,580.24 was cash dividends.
- Your $1,000 in Johnson & Johnson grew to $40,088.31, of which $31,521.17 was stock, and $8,567.14 was cash dividends.
- Your $1,000 in McDonald's grew to $16,092.36, of which $12,944.39 was stock, and $3,147.97 was cash dividends.
Overall, your $5,000 grew to $126,937.61, of which $100,555.71 was stock, and $26,381.90 was cash dividends
The Time Value of Money
You multiplied your money by large proportions in this scenario. You did it without lifting a finger or ever glancing at your portfolio again, just as if you had owned an index fund. You did nothing for decades except let the time value of money work for you.
The McDonald's part of the calculation assumes that you didn't take any Chipotle shares during the 2006 split-off. The returns would have been much higher if you had.
6. Contribute to Your Portfolio Consistently
Contributing to your investments consistently over the years is a great strategy to grow wealth in the stock market. It’s one strategy that works for the average American paycheck. Many people don’t have huge amounts of money at any one moment to invest but do have smaller amounts that they can consistently contribute over the years.
Consistency is a strong investing move. Say you start with an initial investment of $3,000. Invest $500 a month over 30 years at 6% interest, and you’ll have $523,022 in your accounts.
At $1,000 a month, you’d have $1,027,897 at the end of 30 years.
You can use a calculator like this one to see how different levels of monthly contributions can make a difference in your investment results, and If you’re just getting started, you can use an automated investing service like Betterment. For those with a bit more experience, try Personal Capital. It not only lets you keep track of all of your finances in one place, but also has a stellar wealth management service.
Earn Compound Interest
The main reason the stock market has been such a tremendous wealth generator is the effect of compound interest. While you can make short-term profits in the stock market, it’s actually a safer bet to leave your money in the market for the long term and let compound interest do its magic. For starters, the longer you leave your money in the market, the less risk you actually take. While no one can predict what the market will do from year to year, the S&P 500 index has actually never lost money over any 20-year rolling period. That’s an amazing statistic when you think about how volatile the market can be over the short run. If you can keep your money in the market for 10, 20 or even 30 years, your potential to build wealth is tremendous. Think about it this way: If you put $10,000 in the market and earn 10% per year, taking out your profits each year, you’ll have a net profit of $30,000 after 30 years, or three times your money. But if you instead let that money compound every year at 10%, you’ll end up with just under $200,000, or 20 times your money. This may not be the answer that those looking for a quick buck want to hear, but the best, safest way to generate real wealth in the stock market is to stay in it. More From GOBankingRates Social Security: New Bill Could Give Seniors an Extra $2,400 a YearStates Whose Economies Are Failing vs. States Whose Economies Are ThrivingLooking To Diversify in a Bear Market? Consider These Alternative Investments20 Ways You’re Throwing Money Away
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How to stay rich
What it means to be “rich” is different for everyone. For some, it might mean not having to think about money.
For others, it might mean having enough money to leave an inheritance for their grandchildren. Whatever “rich” means to you, once you’ve reached that level of wealth, you still need to work to maintain it.
Here are some ways to stay rich (and increase your wealth), because nobody wants to work all those years to get rich and then lose it:
1. Live below your means
Don’t be tempted to spend extravagantly once you’ve reached your financial goals. It’s often said that people get rich by earning money and they stay rich by spending less than they earn. Aim to spend below your income and avoid lifestyle inflation wherever possible.
2. Diversify your income streams
Lastly, those who stay rich tend to diversify their income streams. In addition to investing in stocks and bonds and keeping a robust emergency savings fund, rich people usually have multiple streams of income. Consider adding real estate investing or other forms of passive income ideas to your portfolio.
7. Flip real estate contracts
Making money with real estate might seem like a long-term prospect, but it’s not. There are ways you can take as little as $500 to $1,000 and invest it in flipping real estate contracts to make quick cash. How? Use a system like Kent Clothier’s REWW to first understand how the market works. It’ll then provide you with the data and tools to identify vacant homes, distressed sellers, and cash buyers.
While most people think that real estate is won by flipping traditional homes and doing the renovations yourself, the fastest money you can make in real estate involves flipping the actual contract itself. It’s arbitrage. Identify the motivated sellers and cash buyers, bring them together, and effectively broker the deal. It might seem odd on the first go, but once you get the hang of it, you can become a mini-mogul in the real estate industry by simply scaling out this one single strategy. It works, and it’s touted by some of the world’s most successful real estate investors.