How To Invest in the Stock Market

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image from pixabay.com

*Disclaimer. I am not professionally licensed in the financial industry in any capacity. I am not licensed to do anything except drive a car and be a speech therapist. You invest at your own risk, and past stock performance is not a guarantee of future stock performance. *

OK, now for the fun part...how to get your money making money for you so you can retire early! It is so simple that it's almost brainless. This is the minimum that I do.  If you have a 401 k with your employer, contribute up to the match. Then find 2 low cost index funds that have shown performance returns over the past 10 years (or longer) of at least 7% or greater. 7% is the historical performance of the entire market. If you are not getting a fund with least an average of 7% return then you need to choose a new fund.  One of the two should be set up as a Roth IRA (a retirement account), and the other should be set up as a normal non-retirement account. Put as much extra money as you can into them every month. That's it. That is how ridiculously simple it is. You can stop reading if you want. But if you want to keep reading, there is some more information below. 

For the Roth IRA: Tax law says that you can put as much of your earned income that you want into this account up to $5500. I max it out to $5500 a year EVERY year, ideally spreading it out into equal monthly payments. Don't take anything out of here until you are 59 1/2 years old or else you might face a penalty (there ARE caveats but I will not go over them here). This money grows totally tax free. If I withdraw this money after age 59.5 I will pay NO taxes on all the earned money! How great is that? 

The other account is a normal, non retirement account. This is what I will use for my early retirement. If I want to live solely off dividends, I wouldn't take any money out until the principle has reached 25x my annual spending. Once it has reached that number, congratulations to me! I am retired!  I can withdrawal 4% a year. Through the incredible but non-magical power of mathematics (read about it over at MMM), my withdrawals will be exactly the same as my level of annual spending. At this point my money will be making more money than I am at my 9-5 job. The benefit of a 4% rate of withdrawal is that this money will theoretically last forever while keeping up with inflation. 

In case something goes wrong and my early retirement money doesn't last forever...well that's actually ok! It really just needs to last until age 59.5. Then tapping into the aforementioned Roth IRA account is an option. This account will be the one quietly growing in the background of my life and should be quite a hefty sum, into 7 figures by my estimates. If something has gone really wrong during my early retirment, then I can always go back to work as a speech therapist again and just wait unitl 59.5 like everyone else.

Now, I can open other accounts if I want to play around and want to save money for any other reason  but the 401k, Roth IRA, and one non-tax advantaged account are my bread and butter. 

But...isn't the stock market risky? What if it crashes??? 

Yes. Individual stocks can by very risky. That's why most good investment advisers don't recommend them. Diversification is your friend because it means that if one stock in the fund tanks, another one will pick up the slack. Some years your total return might be -10% and some years might be +20%. You never know what it will do, in fact, no one knows! That's why I set it, and then forget it and wait for the long term historical average gains of 7%.

If the stock market crashes, I do NOT sell my shares! If I sell my shares, that means that I bought high and sold low. NO NO NO. I always want to buy low and then sell high! When the stock market crashes, guess what? It's on sale! That is why instead of increasing 7% over the past 8 years my investments have increased an average of 15%! I started investing while the stock market was on sale in 2008/2009 the housing crash, at the bottom of the market. Should you wait for a dip in the market to invest?That would be silly because you don't know when it will crash! Start today if you can. But will there be another crash? I'm 100% sure there will be because there always is! The great depression in the 30s. The tech bubble in the 90s. The housing bubble in the 2000s.  Successful investing usually happens over the long term, not from the day to day fluctuations, or the current political climate, or the current fad of the decade. No one can predict what will go up, what will go down, what will make you broke, or what will make you rich. That's why a little piece of everything in a diversified fund should balance itself out while protecting against inflation. 

So what funds will do this? I personally invest with Vanguard because they are widely known for having some of the lowest fees in the industry. I've got an S&P 500 fund and a Total Stock Market Index Fund as my two main funds, as well as some other smaller funds just for fun (some additional goals of mine beside retirement include a down-payment for a house, and money for travel). I also have a Roth 401 k through my employer, who gives a 6% match. For further learning, as I am not an investment professional, I would suggest that you seek professional guidance! I like the Ric Edelman podcast and the Dave Ramsey Podcast. Both of those awesome dudes have lists of investment professionals they endorse in your area, and their podcasts are free sources of awesome information!

Do you have a similar strategy to mine or do you do something totally different? Happy Investing!