6 Reasons Why I Invest In Stocks to Build Wealth
A few months ago, I wrote an article on why I invest in real estate to build wealth. While I am a huge fan of real estate investing, there are many benefits of investing in stocks that I also love. In this post, I’ll dive into the top reasons why I invest in stocks to help bring me closer and closer to my $10M fat FIRE goal.
Low Barrier To Entry
Unlike traditional real estate investing, it is very easy to invest in stocks.
You can start investing with as little as you want. Nowadays, many brokerage firms allow clients to purchase fractional shares. This means you can invest based on dollar amounts instead of number of shares. For example, if Company ABC’s stock price is $200 but you only have $100 to invest, you can purchase ½ a share of Company ABC.
Many low-cost/free brokerage firms. Opening a brokerage account should be free, transferring funds in and out of your brokerage account is usually free, and, lastly, buying and selling shares should be free. If any of those are currently costing you money, you may want to consider finding a brokerage firm with better benefits.
A large selection of investments to pick from. There are thousands of stocks you can invest in. But for those who don’t want to pick their own stocks for a variety of reasons, like not having time to research companies or lack the knowledge on how to determine if a company is good, investing in ETFs or mutual funds is also a solid option.
It Doesn’t Take A Genius
In my opinion, you don’t really need to know all the technical details of how the stock market works, how to read charts, etc. What you do need is basic knowledge on how to get an account set up and which ETFs and/or mutual funds to park your money in for the next several decades. Investing in the most popular, low-cost funds is often a reasonable choice.
Here are a few of my favorite ETFs and their mutual fund equivalents:
| Vanguard ETF | Vanguard Mutual Fund | Fidelity Mutual Fund |
|---|---|---|
| VTI (Vanguard Total Stock Market Index) | VTSAX (Vanguard Total Stock Market Index Fund) | FSKAX (Fidelity Total Market Index Fund), FZROX (Fidelity ZERO Total Stock Market Index) |
| VOO (Vanguard S&P 500 ETF) | VFIAX (Vanguard 500 Index Fund) | FXAIX (Fidelity 500 Index Fund) |
| VWO (Vanguard FTSE Emerging Markets ETF) | VEMAX (Vanguard Emerging Markets Stock Index Fund) | FPADX (Fidelity Emerging Markets Index Fund) |
| VUG (Vanguard Growth ETF) | VIGAX (Vanguard Growth Index Fund) | FSPGX (Fidelity Large Cap Growth Index Fund) |
| VNQ (Vanguard Real Estate ETF) | VGSLX (Vanguard Real Estate Index Fund) | FSRNX (Fidelity Real Estate Index Fund) |
Easy To Diversify
I’m a big fan of the phrase, “Don’t put all your eggs in one basket.” To overcome that, one can simply invest in ETFs and/or mutual funds, both of which resemble a basket of underlying companies. For example, if you invest in VTI (Vanguard Total Stock Market Index Fund), you automatically gain exposure to about 3,500 different companies!
Additionally, you can even gain exposure to real estate by investing in the stock market. A common way to do this is to invest in companies that build real estate (think Lennar or D.R. Horton) or companies that own and invest real estate. Some publicly-listed companies, called real estate investment trusts (REITs), are even required to pay a minimum of 90% of their taxable income as dividends to shareholders. REITs are often some of the highest dividend-payers out there. To further diversify your real estate exposure, not only can you invest in REITs, you can invest in an REIT mutual fund or ETF (like VNQ) to own a basket of REITs with a single investment.
Automatic Investing
Have you heard the phrase, “Out of sight, out of mind”? Well, in the personal finance world, that phrase really rings true to me. I think investing consistently over time is hard because it’s usually a manual and tedious process. I also think most people are too undisciplined to take the time every week or month to consciously withdraw money from their bank accounts and invest it (myself included). Enter.. automatic investing!
Not a lot of people are aware of this amazing feature that many brokerage firms offer. Automatic investing is where you configure your brokerage account to withdraw a specified dollar amount from your bank account (or another brokerage account, if you want) on a fixed, monthly schedule and have those dollars automatically invested into a mutual fund that you already own. For example, you can set up your automatic investment schedule to withdraw $500 from your checking account on the 1st of every month and invest it straight into a mutual fund called VTSAX. In 2020 alone, I auto-invested over $5,000 per week!
Additionally, by setting up automatic investing, you get the sweet benefit of dollar-cost averaging (DCA). DCA is an investment strategy where you invest your money over time instead of investing a lump sum all at once. Doing so theoretically reduces the volatility of stock market swings that are bound to happen.
Lastly, because I know my cash isn’t just sitting around in a bank account earning less than 0.5% every year and is, instead, automatically getting invested in the stock market, I can largely sit back and watch my net worth grow over time. I don’t have to stress over stock market swings or worry about individual stocks collapsing after earnings reports because automatic investing socks away my money into mutual funds only, where I get automatic diversification in my portfolio.
Historically A Great Investment
Historically, the stock market has averaged a 10% annual return on investment. Using the Rule of 72 (used to quickly estimate the number of years to double your money at a given annual rate of return), a 10% annual return would mean you could double your investments roughly every 7 years!
Tax Benefits
Most of us have 9-to-5 jobs and pay ordinary income taxes. And if you’re in California like I am, I’m sure you feel the pain of high state income taxes! However, if you’re on a FIRE journey and are actively working towards building a nest egg to fund your retirement, stocks are a great way to earn income and get taxed at a lower tax rate.
Many companies, including ETFs and mutual funds, pay dividends to their shareholders. And more often than not, they will pay qualified dividends. If they do, qualified dividends get taxed at the long-term capital gains tax rates of 0%, 15%, or 20%, depending on your taxable income. For most, getting taxed at long-term capital gains tax rates are more favorable than your ordinary income tax bracket. So when you retire and no longer have a 9-to-5, you could even be looking at paying close to $0 in taxes, depending on your taxable income and which state you reside in at that time.
Conclusion
While I do pick some individual stocks today, the majority of my money is invested in index funds. And over time, I will move further and further away from owning individual stocks because it’s stressful and time-consuming. I’m no hedge fund manager (like Cathie Wood), so I don’t think I’m qualified to pick stocks myself. Most people aren’t. Therefore, my ultimate plan is to get to 100% index funds, 0% individual stocks.
All-in-all, I am very invested in the stock market. When I reach age 40 with $10M, my expected allocation will be 50% invested in stocks ($5M equivalent). How I plan to build that $5M stock portfolio is no secret; I simply use the tools I’ve described in this blog post. If you’re interested in getting started with automatic investing, check out my new step-by-step guide on how to do this with Fidelity! It’s probably the single-best tool that I use to build my nest egg.
