Can investing make you rich?

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The question that everyone asks at one point on their investing journey. Can investing make you rich if you are not already wealthy? Sure it is easy for wealthy individuals to invest bits of their wealth in every possible avenue and wait until one of them explodes. We often hear things like, “She or He was an early investor in Facebook, Twitter, Uber, Airbnb.” Great, but what about all the other failed investments this person has made, and how much money have those investments lost? By spreading their wealth through a long list of opportunities, people that already have money can diversify the risk enough and capitalize on opportunities that the rest of the market doesn’t have access to.

So what if you don’t have money yet? Can investing make you rich? I don’t want to give a blank answer here. Instead I want to explore & set the expectations both for you but also for my own sake. I have been investing for over 15 years, and I don’t consider myself rich, so what gives? What are the realistic expectations for somebody just starting out on their investment journey?

Can saving money make you rich?

Investing is essentially moving capital (money) from one place to another in hopes that whoever receives that money will do good things with it, and create value for you and society.

That means to invest; you first have to save. In 2021, it is apparent that saving will not make you wealthy. Interest rates are low in order to facilitate borrowing and spending. That also means interest rates on savings accounts are low. How low? Well, it is almost impossible to find anything over 1%. Anything above 1% is usually a promotional offer.

With official inflation rate at 1.2% in 2020 in the United States, if we can believe those numbers, means on your promotional savings offer with the bank, you lose 0.2% a year in real terms. Losing money will not make you rich. So what do we do?

We still need to save, but do something with that money and not just keep it in a savings account.

Americans save around 5-10% of their disposable income historically. This number fluctuates during recessions but let’s assume 10% for simplicity.

Personal Saving Rate in the United States

Source: Personal Saving Rate (PSAVERT) | FRED | St. Louis Fed

According to OECD:

The average household net-adjusted disposable income per capita is USD 45 284 a year.

Source: https://www.oecdbetterlifeindex.org/countries/united-states/

That means the average household saves around $4,500 a year. That’s 45,000 over 10 years. Definitely not in the rich category.

So if you are somewhere close to the average household, the answer is extremely clear that saving alone will not make you wealthy. You have to invest!

Can stock market make you rich?

When you hear the word investing, the first thing that pops to mind is probably stock market investing. It is the most discussed form of investing. It is also the most accessible. All you need is a brokerage account, and you are good to go.

What can you realistically make in the stock market without taking on massive amounts of risk?

Let’s look at the average saved amount per year in the U.S of $4,500. Let’s look at a ten year investment period where we save $375 a month and invest it in a simple S&P500 ETF, SPY. We assume that we will also reinvest any dividend income. Let’s say you started on the last day of 2010 until July of 2021.

Here is what your returns would look like.

December 31st, 2010 Balance: $375

July 31st, 2021 Balance: $126,593

Balance if you saved and not invested: $48,000

You have made an additional $78,593 by investing the money instead of just saving.

Massive caveat: This of course comes with a massive caveat, these returns are just happened to be during the biggest bull market run in U.S history. Will the next ten years look the same? Nobody knows for sure.

What about the risk?

Just purchasing one ETF that replicates the S&P500 is riskier than buying a portfolio with ”safer” assets like fixed income assets or bonds. Although bonds are not risk-free, they do offer stable income flow and relatively lower volatility.

SPY has volatility of around 13%.

Bond ETF like BSV (Vanguard Short-Term Bond ETF) has volatility of roughly 1.3% or 10x less.

So instead of buying S&P500 lets consider an easy to setup portfolio like the All Weather Portfolio. Same numbers, $375 a month.

December 31st, 2010 Balance: $375

July 31st, 2021 Balance: $83,291

Balance if you saved and not invested: $48,000

Not as great as straight out S&P 500 but considering that the portfolio is much less volatile, it is a trade-off worth considering.

How long does it take to get rich from stocks?

So now you got an idea of what is realistically possible without buying some “meme” stock from Reddit and hoping it it will “go to the moon”. How long will it take?

Define rich

To answer that question truthfully you have to define what does “rich” mean to you. Nobody can answer this question for you. Growing up, I remember my mom wishing that we made $2,000 a month because that would make us “good”. Every person will have their number”

But let’s assume a trivial $1,000,000.

How long does it take to make a million dollars from stocks?

For this exercise I will take the All Weather Portfolio that generated money-weighted rate of return of around 8.5% over the last 10 years and I will assume I can expect similar rate of return in the future.

In that case I need to save approximately $4500 a month over the next 10 years to make $999,489 or rounded up to a cool $1MM.

To add to the example, if you didn’t invest in something like an All Weather Portfolio but

How can I speed up the process?

Answer: Undervalued individual stocks. This will always carry a lot more risk. In fact, the vast majority of people will generate returns far lower than if they just bought a ready-made portfolio.

Above I showed you realistic expectations if you invest in something fairly simple like a ready portfolio. However, with time and experience you will be able to shift your portfolio from these portfolios to individual stocks.

This is where research services come in. It is unlikely that you will have the expertise and time to do you own in-depth research in the beginning, so you can rely on experts to give you a hand.

I like two services that stand out to me and I have used them for a very long time. These are not affiliate links, I just find these service extremely useful. Coupled with my own research, they have helped me achieve returns far beyond what a lazy portfolio every could.

Founded in 2011, MicroCapClub is an exclusive forum for experienced microcap investors focused on microcap companies (sub $300m market cap) trading on United States, Canadian, UK and Australian markets. MicroCapClub was created to be a platform for experienced microcap investors to share and discuss stock ideas.

At TipRanks… We make it easy for millions of retail investors around the world to reach better, data-driven investment decisions through our suite of multi-award-winning research tools and simplified alternative datasets. Essentially, we drive transparency by tracking and measuring the performance over 96,000 financial experts, including Wall Street analysts, financial bloggers, hedge funds, and corporate insiders, and making this information publicly available.

I would recommend you avoid blogs like Fool as they churn out content submitted by the public, and most often than not, the quality of that content is extremely poor.

Happy Investing!

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I started my professional career in the automotive industry long before electric vehicles were a thing despite Tesla already existing.

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