What is Investing?
What is investing? Many people’s first thought is a stockbroker; the Wolf of Wall Street-type salesman who calls you with the latest stock tip and advice on how you can beat the market. But an investment is not limited to stock-portfolios. Merriam-Webster defines the word “invest” as “to make use for future use or benefits.” At its core, an investment is simply something you build incrementally over time, receiving a benefit in the future.
Think about top athletes. They invest in their bodies though nutrition and workouts, knowing their off-the-field habits will pay off when the whistle blows. Kobe Bryant was known as one of the fiercest competitors to ever play basketball. Kobe invested in his jump shot every off-season by shooting 2,000 shots a day, ultimately earning him five NBA championships.
From a student’s perspective, you invest your time studying, knowing that the benefit will be a higher GPA, leading to a higher salary when you graduate.
Urban legend claims Albert Einstein believed, “compound interest is the most powerful force in the universe.” The average annual return of the S&P 500, considered a reliable benchmark for the American stock market, has averaged roughly a 10% annual return since its inception.
$10,000 invested today, considering the 10% average return, without any additional contributions, will be worth $174,494 in 2050. If you let that money grow 20 more years, again no contributions, it will be worth $$1,173,909 in 2070.
The initial investment grew $164,000 in the first 30 years, and close to $1M the next 20. The key concept here is time: Whether you are an athlete, student or someone looking to create wealth, the more time you invest in something, the greater the future benefit.
So how can you get started? $10,000 is a lot of money for most college students, but luckily there are some great tools out there, allowing investors to get started with $1 or less. (Robinhood, TD Ameritrade, etc.) The first step is to open an account and make a deposit.
Buying individual stocks can be risky and time-consuming, so for most investors the best way to build wealth is to “buy the market” though either an ETF (exchange-traded fund) or mutual fund. These products shelter investors from the risk of the individual stocks, while providing them with the return they desire. Companies such as Charles Schwab, Fidelity and Vanguard all have funds that fit this need, and typically are titled “Index Funds.”
The market is opening opportunities for first-time investors to build long-term wealth as investing becomes increasingly democratized. The longer your money is in the market, the more you will have in the future. The average person does not have the time to research and find the best stocks out there, so “buying the market” is typically the best option for new investors. Considering how easy it easy to invest today, 2020 is a great time to start investing.
Major US Stock Indices:
Dow Jones (DIJA): 30 large publicly traded US companies
S&P 500: 500 of largest publicly traded US companies
Nasdaq Index: 2,500 American stocks & other equities, mostly technology related
Major European Indices:
Financial Times Stock Exchange (FTSE 100): 100 largest companies on London Stock Exchange. (Footsie)
Euronext 100 (N100): 100 largest/liquid stocks traded on Euronext. (Largest stock exchange in Europe)
Deutscher Aktienindex (DAX 30): 30 largest German companies traded on Frankfurt Stock Exchange
Major Asian Indices:
Nikkei Stock Average (Nikkei 225): Top 225 blue chip (high value) companies traded on Tokyo Stock Exchange
Hang Seng: 50 largest companies of the Hong Kong market and is considered a main indicator of overall market performance in China