The stock market is not the best way to build wealth

I’ve spent numerous years thinking that if I just understood the market better, educated myself better, consumed more educational materials from professionals, that I would be able to supplement my day job income with making a significant and reliable passive income in the market. I thought I could get ahead through market investments.  

For the majority of people, the stock market is not a great way to build a passive income that you can easily utilize on a day to day basis.

Don’t get me wrong. People should be investing and saving, and the majority of people should be in the long game, not the short term game hoping that their stock investments will change their lifestyle within the next 20-30 years of their life. 

Making bets in the market

I thought that I could use a percentage of my investments to try and make money to really get ahead with higher risk investments. So far, it has been great when pretty much all the major stocks are climbing, but then there are major fluctuations that come along such as fears of Coronavirus and you end up with losing a significant percentage of your capital. Which is fine because the market will always have its fluctuations, but that money is locked in. I wouldn’t be able to make myself sell even if I needed the money because I would have essentially bought high and sold low, which is the opposite of what you want to do.

I’m not the only person who thought they would try beating the market and taking on more risk with a percentage of their portfolio. Sam started Financial Samurai in 2009 to help people achieve financial freedom. He worked in investment banking and retired at age 34. In his article, “Why It’s Harder To Get Rich Off Stocks Than Real Estate” he talks about his “Punt Portfolio”. This portfolio was equal to 10% – 20% of his public investments where he would try to beat the S&P 500, shooting for the top end of 10 – 20% range. He gives a great example of how he bought Tesla stock, but that it was hard to ignore the fear of a sudden >35% drop and what that would mean for his hard-earned money. He said he had no desire to watch his money potentially vanish. He goes on to talk about how he feels that real estate investments are safer because there are more tangibles involved like the potential to rent and generate an income and the fact that it is easier to hold over the long term because it isn’t as liquid as a stock. Real estate may be a way to build wealth before retirement in a more reliable and consistent way than the stock market. We will study this in future posts! 

You won’t get ahead trying to find the next Amazon

People like to publish stories of how one person made millions by investing in specific stocks like Amazon, but to make this happen you would have had to put money in at the right time and waiting a solid amount of time. This is very difficult to do. Another example is bitcoin. If you had bought in at the right time and waited you would have had a great outcome. To find these deals on a consistent basis for the majority of people is not feasible. Even real estate can be difficult, but for the previously mentioned reasons of having a real asset that is more in your control than a stock can be a better option.

We all should stop day-dreaming about how we might pick the next huge stock to multiply our wealth. It is awfully tempting to tell yourself that you can make money if you just start actively investing a little more of your salary. There is research that supposedly tells us that active investors can’t beat passively managed index funds in the long term. I haven’t seen the studies, but I believe that it is true for the majority of cases. Placing your money into the market on singular stocks without having solid technical reasons for doing so is almost like gambling. Most of us don’t have an idea if a company’s stock will go up or not. 

So what should we do to get ahead and build freedom through our incomes?

Focus on your earning potential

People should by no means neglect their finance education and learn to invest in the market, but I believe that people should be more focused on their earning potential. This means how much can you earn in a week and taking the necessary steps that will lead to a higher income. 

How do people do this? Many ways. Real estate being one, like the Financial Samurai describes in the previously mentioned story. In order to find what you should do, you need to figure out something that you can be really passionate about. You may be passionate about working in a team, it doesn’t have to be a specific topic like medicine or marine biology. Sometimes you also just have to take the leap towards an opportunity and see where it takes you. You might learn to love something that you never imagined that you would! 

Experiences build on each other

The more experience you get the more you will be able to build your mindset to identify opportunity. Knowledge and experience is something that no one can take away from you. Sure, something you try might fail, but the experience you gained through that process will carry you farther next time.

Find your passion, seek out opportunities

To summarize. We should learn how to invest, but if we want to build wealth in the short term we should start looking for our passion and seek out opportunities that allow us to focus on building our earning potential before starting other investment-based income streams. 

Leave a Reply