It seems like you can’t watch a YouTube video or scroll through Facebook without seeing an advertisement about some new way to make money quickly. The messaging in our culture is clearly that you should be rich, and you should be rich right now!
But if you really want to be successful in building wealth, the get-rich-quick mentality is often a trap. Here are a few things to know about investing to help you make solid decisions when building wealth.
Risk Management Through Indexing
Suppose you go to Oaklawn for a fun day of betting on horses. You decide to pick just one horse to bet on to win in each race. If your horse wins the race, you will win money. If your horse loses, you will have lost the entire amount you put up. Similarly, when you buy an individual stock, you are placing your hard-earned money into just one company.
You pick a stock hoping it’s the next big thing. If the company you select makes a big advancement and suddenly has a lot of interest, your stock may go up and you will possibly make a nice return on your investment. If the company turns out to be a stinker, then you lose and your investment may turn into a loss. Single-stock investing is not for the faint of heart and it carries risk.
Index funds are designed to bet on all of the horses in the race instead of just one and give you a return based on the overall winning and losing as a whole. For example, the S&P 500 is an index fund that invests in the top 500 largest companies in the U.S. If 100 of them have a negative return but 400 of them have a positive return, then you will more than likely have a positive net return on your investment.
The fancy investing word for this is diversification. By putting your eggs in many baskets instead of just one, you avoid single stock risk. Perhaps more importantly, you stand to gain all the advances of all of the companies in the index, and that can amount to more consistent growth over time. The bottom line is that index funds greatly reduce the risk of loss through diversification.
The Time Factor
I remember opening my first brokerage account in the mid 90’s at a local brokerage firm here in Little Rock. I had saved up $1000 dollars and was so excited to invest in a company that one of my college professors had been talking about in class. I remember the company specifically as a medical supply company that produced new glucose test strips that were supposed to be a gamechanger for diabetics. I felt so lucky to be getting in at such a low price of $4.25 a share. When I opened the account, I instructed the rep to put $500 in a S&P 500 mutual fund and the other $500 in the pharmaceutical stock. Fast forward 5 years later and my S&P 500 fund had almost doubled in value. However, my pharmaceutical stock was worth a mere 17 cents per share.
Since time is the secret ingredient to building wealth, the best bet is to get started as soon as possible. At Fiduciary Wealth Management, we specialize in helping people establish a financial plan that is well-rounded and fits with their risk tolerance.
To get your money working hard for you today, schedule a phone call now!
About Rocklin Senavinin, CFP®
With over 20 years of experience in the financial planning industry, Roc has dedicated his career to helping individuals live comfortably in retirement and enjoy the assets they have spent their career building. He is co-founder of Fiduciary Wealth Management, a fee-only registered investment advisory firm in Little Rock, Arkansas. As a CERTIFIED FINANCIAL PLANNER™ professional, he has advanced training in the holistic process of creating a personal financial plan that addresses a person’s comprehensive needs for the short and long term. To learn more, connect with Roc on LinkedIn or visit www.fidwm.com. If you have questions, feel free to schedule a phone call using this link.
The views expressed represent the opinions of Fiduciary Wealth Management, LLC and are subject to change. These views are not intended as a forecast, a guarantee of future results, investment recommendation, or an offer to buy or sell any securities. The information provided is of a general nature and should not be construed as investment advice or to provide any investment, tax, financial, or legal advice or service to any person.
Additional information about Fiduciary Wealth Management, LLC is also available on the SEC’s website at https://www.adviserinfo.sec.gov/Firm/284324. Please call or email with questions.