Investing is the purchase of an asset with the goal to earn more money in the future. Assets can include anything from stocks and bonds to real estate.

You can invest in almost anything.

This guide is going to focus on stocks and bonds because anybody can start with a very small amount of money.

Investing can significantly build your wealth over a long period of time.

If you follow a few simple principles, you can end up with a 6-8 figure bank account.

The best part is that it’s all completely passive. There is no additional work that you have to put in, your money works for you.

This graph shows how your money grows over time with a long-term investing strategy.

Your money will grow more and more each year due to compound interest.

Compound interest is what Albert Einstein called the “Eighth wonder of the world.”

Not only do you earn interest on the money you invest, but you also earn interest on interest.

Historically, the average return of the stock market has been about 7% annually. The standard savings account earns .06% annually.

The spread between long-term returns and holding money in a bank is significant.

With higher interest, your returns are exponentially greater than keeping money in a bank or underneath your bed.

This is why investing is important.

When you invest for the long-term, the time horizon is generally 20+ years down the line.

The time is different for everybody, it depends on when YOU need the money.

Long-term investing tends to produce great returns because companies are resilient and grow over time. Even when there are downturns in the economy, companies almost always recover.

Here is a graph showing the stock market average over a 40 year period from 1980 to 2021.

Do you notice the upward trend? It continues to increase through various economic recessions.

On a few occasions, it would be very tempting to exit the market because it’s going down. But if you keep your money in the market and hold true to your strategy, history shows that you will walk away a winner.

Long-term investors care about the overall trend, not the small ups and downs.

We’ll dive deeper into what a good long-term investment strategy is, but the big idea is to stay in the market as long as possible.

Now it’s time to talk about short-term investing.

Short-term investing is focused on time horizons of one year or less.

The most extreme case is day trading.

Day trading is nothing but speculation, and often times day traders lose money with aspirations of getting rich overnight.

I hate to be the bearer of bad news, but wealth is not built overnight. Building wealth takes time but is very rewarding.

Let’s take a look at the market average over a one day period.

Look at all of the peaks and valleys over the course of a single day.

Short-term traders focus on all the small peaks and valleys and try to guess which way the graph will go.

While there is an opportunity to make money, the fundamentals are non-existent for such a short duration.

Apart from having a very low probability of success, you are putting in much more time compared to long-term investing because you have to constantly analyze and research.

On top of this, you are trading against professionals on Wall Street who can execute trades much quicker than you.

Capital gains are the appreciation of an asset’s value over time.

If you purchase something for $100 today and it’s worth $150 in one year, that is a capital gain of $50 or a 50% return.

Returns are commonly referenced as a percentage annually because it’s relevant to any portfolio size.

Nobody is going to hold it against you if you refer to a return in dollars, but it’s a little misleading because a $10 gain in a $50 portfolio is vastly different compared to a $10 gain in a $100,000 portfolio.

Dividends are the second part of the equation that are factored into returns.

Companies pay dividends to investors as a reward for owning a share of stock.

Let me show you a model.

After a company receives money, it will first reinvest a portion of it back into the company.

Any money left over will be given to investors in the form of dividends.

Companies typically distribute dividends every 3 months but some pay monthly.

Investors consider any return above the market average to be good.

7% has been the historical market average over the long-term after inflation.

Some years may have returned over 30% while others may have -30%. Even though the market swings daily, it’s the long-term average that truly matters.

Here is a graph showing the annual returns of the market from 1980 to 2020.

Time in the market is more important than timing the market.

Did you ever hear of the snowball effect?

When you roll a snowball downhill it gains momentum and gets bigger.

The same is true for investing. The only difference is that the ball is made of money.

The snowball effect works in investing because of compound interest. You earn interest on your principal investment and interest. That’s right, interest on interest!

Your interest snowballs year after year.

The larger your initial investment and the longer you stay in the market will lead to larger returns.

Growth stocks focus on growing the share price exponentially.

High-growth companies generally don’t pay dividends because they reinvest revenue back into the business to grow even more.

You can see the share price of Microsoft has grown exponentially producing amazing returns.

Growth stocks are the riskiest types of stocks because they are more volatile than others.

Additionally, the only income you will see is when you sell the stock since most don’t pay dividends.

Dividend stocks are favored among many long-term investors because they generate cash flow.

Nothing is more rewarding than seeing dividends show up in your account.

Most dividend oriented companies have linear share price growth and pay dividends on a quarterly basis.

Some companies pay dividends monthly, but most pay every quarter.

Coca-Cola is a great example of a classic dividend stock.

The share price growth is stable and dividends have been increased for 59 consecutive years.

Bonds are similar to loans.

As an investor, you act as the bank where you lend money in exchange for a yearly interest rate for a fixed amount of time.

When the time expires on the bond, the principal is then paid back to the investor.

Bonds are typically issued by the government and local municipalities but there are also private bonds.

Let’s say you lend $1,000 with a 5% annual return for 10 years. Each year you will get $50 and at the end of the 10th year you will receive the principal of $1,000 returned for a total of $1,500.

Each bond is rated based on safety.

Ratings can be anywhere from AAA (best) to D (worst).

AAA bonds have the lowest probability of being defaulted making them essentially risk-free. Oftentimes, the U.S. Government issues AAA bonds and the U.S. Government fully backs all their bonds meaning they must pay back the principal.

Lower rated bonds are referred to as “junk bonds”.

The tradeoff is that the annual return can be much higher but the default probability is much higher as well.

Bonds are seen as less risky than stocks because interest and principal are predictable and more often than not, guaranteed.

Most investors put their money into bonds when they fear the stock market will crash because it’s a safe place to store money.

You have to decide your risk profile.

Do you want lower returns with more downside protection or higher returns with less downside protection?

Whatever you prefer, you should now have a good basis on what types of companies you want to invest in.

Any risk that can not be planned for is a systematic risk.

Systematic risks include government policies, pandemics, and natural disasters.

These are risks that affect everybody and are ultimately out of your control.

Regardless of what you invest in, you will see systematic risk reflected in your investments.

Even when Apple performs poorly, you have other holdings to minimize your losses.

This is why so many people encourage diversification in long-term portfolios. Every company has rough periods and investors depend on other holdings to keep everything in control.

You are rewarded from bearing risk, but not unnecessarily.

An unnecessary risk is putting all your eggs in one basket.

Simply type the name of the stock you want to look at in Google and click “Max.”

I must emphasize that past performance doesn’t guarantee future results, but it can give you insight into the stability of the performance.

Would you use the product or service yourself?

This is a good question to ask yourself anytime you make an investment.

Don’t just invest because somebody on Reddit or YouTube told you. Think deeply about the quality of the product/service being offered by the company.

If you enjoy using a certain product, odds are many others do as well and the company is doing something right.

Zooming out a bit from looking at the company, it’s also a good idea to observe the industry and where it’s headed.

Look at the energy industry.

Our world is becoming increasingly concerned with renewable energy to help sustain the environment.

The industry is headed in a clear direction and companies who don’t adapt will be left behind.

Another good example is the increased concern for security in the technology industry.

People are very concerned with privacy and we are slowly seeing more companies implement better security policies in their products and services.

I’m a big believer that good leadership produces good results for the company.

Some leaders just naturally have what it takes to make the right decisions and grow the company.

Go to a website like Glassdoor or Indeed and look at the employee reviews.

It’s no surprise that many of the top-rated companies based on employee reviews are top performers in the market. Employees who can get behind the company and leadership will produce better results.

Growth investors primarily invest in high-growth companies in hopes of getting the ultimate return.

They don’t care about dividends because most high-growth companies don’t pay them. This strategy is solely focused on capital gains.

Classic examples are tech companies like Google, Amazon, and Netflix.

Value investing is a strategy centered around purchasing stocks at a discount.

Based on fundamentals, you can determine the true value of a stock. If you find out it’s trading for a value below the “true value” then you should make the purchase.

This takes a lot of skill and there is no definitive method for determining the value of a stock. Analysts do this daily and they still get it wrong most of the time.

A good time to buy is when the market falls due to systematic risk (such as COVID-19). This is known as “buying the dip.”

Investing with this strategy is a bit more time intensive because you have to constantly watch the market.

Inflation typically sits around 3% giving investors a 12% margin on the dividend increases.

Dividend-growth companies tend to be high-growth and have a lot of cash on hand.

Pure dividend investors focus solely on yield.

Even if the share price is decreasing, yield chasers will invest if the yield is very high.

This can be dangerous because a decreasing share price can pull the total return down even if the company pays dividends.

Prospect Capital (PSEC) pays a high dividend yield but the total return is -44% all time.

This strategy works better when companies grow their share price and pay a fair yield. A fair yield is anything above the market average which fluctuates between 1 and 3%.

You should always be cautious of high-yield companies because it means the company isn’t investing much back into itself to grow.

Fractional Shares

Investors can purchase fractional shares which are great for stocks that have high share prices.

Maybe you want to invest in Amazon but you don’t want to pay $3,000 for a share. With as little as $1, you can invest in any stock.

Fractional shares offer more flexibility to invest in holdings that have high share prices.

Automatic Dividend Reinvestment

Portfolio Balancing

Based on how holdings perform, they can become underweight or overweight relative to what you had allocated.

If you want your portfolio to hold 5% of Apple and the stock performs well, it will become overweight to a number greater than 5%.

If these holdings drift too far from your allocated weight, you can rebalance them back with the click of a button.

Organization

Keeping your portfolio organized makes it easier to invest for the long-term because you have full control over everything.

One Trading Window

Some may see this as a negative but I think it’s beneficial.

M1 Finance has only one trading window every day.

This is great for long-term investors because it creates discipline and doesn’t allow for the bad habit of day trading.

The trading window is shortly after the market opens each morning so just make sure you know what you want to invest in prior to its opening.

How to Get Started

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Warren Buffett is arguably the most successful value investor of all time.

His investing principles are simple:

1. Invests only in what he understands
2. The business has long-term growth potential
3. Leadership is trustworthy and competent
4. Company is a good value

Warren is the CEO of Berkshire Hathaway and has amassed a fortune of over $100 Billion.

Berkshire Hathaway yields an average return of 20% which is far above the market. The Warren Buffett method of investing is not complicated and seems to work consistently.

Peter Lynch is a very successful investor who uses very simple methods.

1. Buy what you understand
2. Do your research
3. Invest for the long-term

Peter’s net worth is over $450 million. He managed the Fidelity Magellen Fund from 1977 to 1990 and generated an average return of 29.2%.

Go to Amazon or your local book store and buy The Intelligent Investor by Benjamin Graham.

This is considered the best book on investing and it was the catalyst for Warren Buffett.

Graham explains all the principles of value investing and how to build enormous wealth through long-term investing.

The book dives deep into analyzing a company, the concept of risk, and value investing. Many people have built fortunes based on the principles described in this book.