Making money is so simple. You will be flabbergasted to know why. Here is the proof.
Let’s take one of the riskiest asset classes in the investment universe: Equities. And let’s be more specific: the USA stock market. And let’s go one notch down: Standard & Poor’s 500 index.
You would argue that deciding when is the right time to invest is very difficult (i.e. market timing) and those that can make money do so because are able to calibrate the entry points, i.e. they can time the market or they know when to buy and when to sell. These are called magicians. They have a spherical ball.
Just to give you a high level perspective: there is no such professional investor who is able to consistently beat the market.
Let’s suppose you can beat the market (i.e. if the S&P500 grows at 4% per annum, you grow your portfolio by 6%). You have to be able to consistently do better than the market. And consistently means over time. And provided you are able to do so (i.e. 1 in a million investors), it is a very time intensive activity and it is very risky, because if you try to do it you might end up with a lower performance than the market (which is bad) or lose a lot of money (which you do not want it to happen).
Bottom line: there are no magicians in reality. But you can become one of those if and only if you save money over time and invest what you save over time. You got to be disciplined and organized, methodical. This is it.
Let’s look at the S&P500 Index for example. The recent history is very interesting and insightful as there are several points since the popping of the dotcom bubble until today.
The chart shows why.
Investing in the US stock Market would have made you money despite the high volatility, despite the dotcom bubble and despite the Global Financial Crisis. How? By not trying to time the market and not trying to forecast anything. You might be thinking how this could even be possible! It is possible indeed.
This chart offers lots of insights, the more interesting being the timing and succession of events as well as the shape of the chart over the past 20 years. We had two very big crashes, i.e. the Dotcom bubble and the Global Financial Crisis. The former is less severe (almost half as severe as the Global Financial Crisis). Indeed the market crashed 26% after the peak of the Dot Com bubble and crashed 43% during the Global Financial Crisis. This is a lot.
The crashes were not fast and did not happen overnight. They were slow and took years. 2 years for the DotCom Bubble and just over a year for the Global Financial Crisis. However the market recovered. But the recovery was much slower. It took around 5 years for each crisis. It took 5 years to reach the previous peak levels. This is a lot of time. But do not despair. Serious investing takes time and smart investing takes time plus a bit of patience.
So what do you do out of this? Again you can make money just by investing a fixed amount of money either every quarter or even every month.
Yes, let’s imagine you have a spare $1,000 a month you could invest. And let’s imagine you started investing 18 years ago. By buying $1,000 worth of S&P 500 index every month it would have generated you $435,261 (or 4% return per annum). This is a nice pot of money.
This teaches lots of precious stuff. You make money even despite the worst events (i.e. Bubbles pops). And you make money without worrying too much on what is going on in the Financial Markets. As a matter of fact, understanding Financial Markets and the global Economy is not an easy task. Just look at the tons of full-time financial professionals that cannot get things right.
You do not need to be a financial professional. You just need a method (save and invest every month), a strategy (do not time the market), and a long-term vision (one or two decades, or a lifetime!).
If you started investing at any point in time during the last 18ys you would have made money. Of course you would have made the most money by buying low and selling high, which is from point 4 to 6. However this would have been impossible to do ex-ante, unless you have a spherical ball, i.e. you are a magician. Also, this would have been impossible especially if you do not look at financial data 24h.
But you do only need to look at financial data once every month, that is when you deploy your capital to make your next investment.
Start now.
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