A Simple Guide to Building Wealth by Investing Wisely
If you’re unsure of how to invest, it feels like everyone tells you “quick money schemes,” day trading is too overwhelming, but yet, you still want to build wealth; read this article! You need to learn how to place your money in the right investment to get the most benefits. It seems complicated, but building wealth can be as simple as being aware of what’s on the market.
What Stocks Build Wealth?
The simplest way to build your wealth is to invest in an index fund (such as SPY, or IWM). Now you’re thinking, oh gosh, what is an index fund?
An index fund replicates the performance of a particular market index. Let’s break that down; if you invest in an index fund, it tries to match the performance of a market index, like the S&P 500. So imagine the most successful stocks on the market (S&P 500); an index fund copies the strategy of those stocks to receive the same positive performance.
Why is that valuable? Because it will give you market-like performance (almost exactly, minus a fraction of a percent), market-like risk, and almost zero brain cells used to manage the investment. If done correctly, this strategy can make your money grow by 50% in 5 years. Not bad! If a particular style or market is going to do poorly in the future, use multiple ETFs to diversify your portfolio.
What Data Does an Index Fund Reflect?
The below screenshot depicts a stock screener backtested through software developed by Equities Lab that shows the data of the index fund SPY. If you’re interested in learning more about how to create your own stock screener, feel free to contact us by emailing sales@equitieslab.com.
The below screenshot depicts the creation of the stock screener and how a user is capable of choosing which index fund he/she wants to learn about. To diversify your portfolio, you can always examine other index funds and invest in them.
How Does an Index Fund Compare to the S&P 500?
The below screenshot shows the stock screener (index fund, SPY, in green) and the S&P 500 (market index, in red) on the same graph. Visually, you can see how the index fun mirrors the S&P 500 but still does not outperform it. That is expected with this diversified (Japan, emerging market, US small caps, S&P 500) basket of ETFs that the screener did not perform as well as the S&P 500.
However, if you place your money in an index fund (specifically, SPY), you can know that it will replicate one of the most successful funds on the market, meaning you will have an investment that should perform well.
The below screenshot shows the data going back to 2000. You can see that even then, the index fund was similar to the S&P 500.
Equities Lab’s Thoughts
Even though the S&P 500 will almost always outperform the index fund SPY, it should be clear that, for the long haul, investing in stocks is a relatively reasonable way to triple or quadruple your money because of the replication of success. Seeing what does well, doing it yourself, and then capitalizing on it is the best way to invest your money to build wealth. To start investing, put your money in an index fund!
If you want to learn more about investment strategies, create your own stock screener, and build your financial knowledge, check out what Equities Lab has to offer you.
