How to passively make money from the Stock Market
I am not an expert in finance, but when I look at the S&P 500 historical annual returns, I wish I had started investing my savings in the stock market way earlier.
If you’re not familiar with the US stock market, the S&P 500, which stands for Standard and Poor’s 500, is a free-float weighted measurement stock market index of 500 of the largest companies listed on stock exchanges in the United States.
That said, especially if you’re new to the stock market, picking individual stocks is quite hard and sometimes very risky. Will the stock go up or down? Is the stock overvalued or undervalued? Is the current stock price fair? Etc, etc…
Furthermore researching which stocks to buy and sell takes time, and if you’re like me with a full-time job and a family, finding that time can be complicated :)
So, how can we invest our savings in the stock market with no effort and lower risk? The answer is actually quite simple. If you cannot choose individual stocks, then chose them all, or at least the best 500!
Wait, what?! Are you saying to buy the S&P 500 index? Well, not exactly, but yes! You cannot buy the S&P 500 itself, but you can buy shares of an Index Fund that owns a portfolio of companies which follows the S&P 500. For example, you could invest into the Vanguard 500 Index Fund (VFIAX) or Fidelity 500 Index Fund (FXAIX). There is not much difference between the two in terms of returns. I personally prefer the Vanguard because of the lower initial minimum investment required to enter the fund.
Alternatively, if you’re running on a low budget, and cannot meet the initial minimum, or you want to have the flexibility to buy/sell during market hours, you should look at the Vanguard S&P 500 ETF (VOO). If you’re wondering what an Electronic Traded Fund (ETF) is, here you can find a nice explanation!
OK. You’re telling me to buy the market, but what if the market goes down? Well, that’s a possibility of course! But generally speaking there is no bear market without a bull market, which means that at some point in the long term the market will go back up (generally even higher)!
Index Funds help you to mitigate individual stock volatility, and in the long term, with a >10% annual compound interest rate, you’ll get a sweet return on your investment!
Investing into an Index Fund is for the long term, and the secret of success is to invest a fixed amount regularly independently from the actual market value. This strategy is call Dollar-Cost Averaging. The idea is to periodically invest across a target asset in an effort to reduce the impact of volatility on the overall investment.
Finally I want to end this post answering a very practical question. How much will my $10,000 USD be worth in 30 years if I invest into an S&P 500 index fund today? The answer varies. With a 10% average annual compound interest, the answer is $174,494 pre-tax. However with a 15% rate, the answer is $662,118. As you can notice, compounding interest is a very powerful mechanism to grow your wealth very efficiently. I may write about this topic in the future, but meanwhile you can do your own research about it. It’s a pretty simple concept and should be quite straightforward to understand.
Hope beginners will find this article useful. If you have any questions, please write in the comments below.
