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 FI/RE goal.

Low Barrier To Entry

Unlike traditional real estate investing, it is very easy to invest in stocks.

1. 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.

2. 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.

3. 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?ETF (Exchange-Traded Fund)A basket of stocks or bonds that trades on public exchanges throughout the day, giving you instant diversification with lower management fees and better tax efficiency than most mutual funds. 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:

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!

However, be cautious about adding multiple index funds thinking you are getting extra diversification. Many popular funds share the exact same top holdings. If you hold dividend and broad market funds simultaneously, see our VOO vs SCHD Overlap Breakdown or compare dividend leaders in SCHD vs VYM to measure your real single-stock exposure.

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?Dollar-Cost Averaging (DCA)Investing a set dollar amount into the market on a regular schedule (like every payday) so you automatically buy more shares when prices dip and fewer when they peak.). 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?Rule of 72A quick mental math shortcut to estimate how many years it will take an investment to double: divide 72 by your expected annual return (for example, 72 ÷ 8% = 9 years). (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 FI/RE 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?Qualified DividendsDividends paid by regular US corporations and qualifying foreign firms that are taxed at lower long-term capital gains rates (0%, 15%, or 20%) instead of higher ordinary income tax rates.. 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?Long-Term Capital GainsProfits earned from selling assets you owned for longer than one year, which are taxed at preferential rates (0%, 15%, or 20%) rather than standard paycheck income tax rates. 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. For a complete side-by-side comparison of the exact funds and tickers I use across Vanguard, Fidelity, and Charles Schwab, see my full Recommended Low-Cost Index Funds & ETFs Guide.

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.