When I look at the richest people in the country, I see one thing that they all have in common: they make a lot of money off of their investments. I’m a big believer in hard work, don’t get me wrong, but it seems to me that the best way to get really rich is to invest wisely.
So I’m making it a goal of mine to get really good at understanding how the market works. I want to become an expert in stocks and bonds even though I don’t plan to work in finance for a living. I want to be able to get out of the market before big crashes, buy back in on the cheap, and pick stocks that will rise quickly. How should I go about making my goals a reality?
The stock market is a thrilling place, where millions can be made--and millions can be lost. You’re quite right to note that the richest people in our country tend to make a lot of investments, and it’s absolutely true that investing is a key to building wealth. But your strategy for getting rich quickly through superior financial knowledge may be flawed.
Sure, there are plenty of experts out there who make a living trying to crack the secrets of the market. Mathematicians develop algorithmic trading formulas, take deep dives into information about little-known and well-known companies alike, and closely follow news from the world of finance and beyond, hoping to discover the next big thing. Finding undervalued stocks, buying at the right time, and getting out--or even shorting--big market crashes can be an effective way to get very, very rich. But it’s only effective if you manage to do it well!
And doing it well is difficult, even for those who do this sort of thing full time. Success stories abound, sure, but so do failures. And many people who try to “time the market”--a term that refers to your idea of getting out before the big crash, then getting back in when stocks are cheap--end up getting the timing all wrong, and find themselves missing out on big gains, taking big losses during an unexpected crash, or both.
This isn’t to say that you can’t go into finance as a career and succeed. But it does suggest that you may find it rather difficult to become a stock-trading superhero in your spare time. Studies show that index funds--investment vehicles that own wide swaths of stocks in order to better capture the ups (and downs) of the market as a whole--usually outperform investors who try to identify individual stocks and investment opportunities (and these are the pros we’re talking about!). In other words, it may be better to not try to become a stock wiz--and to instead diligently invest in a well-rounded, diverse portfolio. At your age, you can expect to see a stock market dip or two before retirement, but experts say that timing the market is a bad idea for most of us, too. Your best bet is likely to be just weathering the storms, continuously investing and saving, and keeping things safe with a diverse portfolio.
“Rule No. 1: Never lose money. Rule No. 2: Never forget Rule No. 1.” -- Warren Buffett