It’s not about what price you bought VTI/VTSAX or other similar low cost index fund at. Its about how many shares you have.
The more older I get the more I start to realize that some things just don’t matter. The stock market rallies and then it crashes. No one knows how high it will climb or how low it will drop and it doesn’t matter. Some people are excited at how fast stock x is rallying to all times highs and how tragic it is that stock y is headed towards bankruptcy. All we have to do is buy them all in a well diversified low cost total stock market index fund or ETF. It’s not about what price you buy your low cost index fund at, but it’s how many shares you have that matters. After that it’s patience. These are generally not investments for short term growth. It’s best to hold these low cost index fund for at least 5-10 years, but the longer you hold it the better because the stock market will always go up. If you have to sell, it’s better to sell some shares when the market is at all time highs and buy when the maker is in a correction or recession. Because no one knows when or how long these periods will last. It’s best to have a good 3-6 months emergency fund in place to avoid selling down your portfolio in a recession or correction. The best thing of course is to never sell until you reach retirement. At that point in time you can buy a higher portion of bonds which are more stable with lower probability of selling at a loss.
Stop Thinking and Start Buying.
It’s true that it’s better to sell high and buy low, but if your time horizon is long and you have more than ten years until retirement then it’s time to stop thinking and start buying. Buy your low cost index fund early and often. Don’t look at the price, just buy. Time in the market always beats timing the market. All you have to do is continue to dollar cost average with consistent investments into your fund and whala, you will have a nice nest egg at retirement. Aim to invest 10-15% of your income for retirement and its hard to fall short of reaching your retirement goals. Of course it’s best to plan throughly and calculate your retirement number, but 10-15% is a good rule of thumb that will definitely get you in the ball park of your retirement number for a 30- 40 year investment period and not usually meant for early retirement calculations. Say for example you make thirty thousand dollars a year. If that is the case then you would have to invest 15% of your income for 40 years at an average return of 7% per year to retire with a million dollars. The lower your income the more on the extreme side you will have to be to meet your retirement goals.
Speaking of early retirement this is one principals that most of the members of the FIRE community have down pact. They ramp up their savings rate to an incredible number like 50-60% and then put it all in a low cost index fund without even thinking about the price. They get to 25x their living expenses and then retire. It’s a beautiful concept. The only problem with the concept is that the market will have dips and they will either have to obtain a passive stream of income to lean on during those times or just go back to work if the economy has a long 5 or 10 year recession. The other problem with early retirement is that you will generally need an early retirement portfolio and then a regular retirement portfolio which can get complicated in calculating your final retirement number.
2 thoughts on “How to build wealth through investing in the stock market”
Stop thinking and start buying!! Yes!! SO many of my friends are so hesitant to get started that they end up not even starting in the first place!