Is the Stock Market Still the Key to Financial Freedom?
by Andrea Moya– November 11, 2009
As a young professional lucky enough to enter the work force during the Great Recession, I’ve often wondered how one can even begin to build wealth when the economy is so uncertain. I’ve read books, consulted with people who have maintained financial stability through hard times, and yet all the signs still seem to point towards the least likely place– the stock market. So at 23, working at my first job, and in the midst of a weak economy, I have begun to seriously consider investing. My head is swimming with questions!
Do you need a lot of money to start an investment portfolio? How do you begin to navigate your way through the stock market? Now that we’re in a recession, is investing in the stock market really Fab & Fru? –I turned to our go-to financial planner Michael Hardy for some answers and here’s what he had to say.
What is an Investment?
Michael explains that an investment is “anything that has potential to make a return.” This includes real estate, stocks, bonds, even your savings account is an investment simply because you earn interest on it. However, I wanted to focus our conversation exclusively on the stock market and why developing a portfolio of stocks, bonds, and funds, even without having a lot to invest now, is crucial to future savings and wealth.
Pay Yourself First & Always Live Below Your Means
“The key to building wealth is to save,” says Michael. Like in the books Rich Dad, Poor Dad and The Millionaire Mind, Michael advises that the most important thing is to “pay yourself first.” When you put away money, you provide safety for yourself and for your family. Most people live above their means and never save…sound familiar? Millionaires and other wealthy people live below their means and save and invest as much they can. “Time is your biggest asset,” says Michael, noting that the longer you let an investment grow, reinvesting with the interest you earn, the more value it accrues over time- even if that investment starts small.
Fab & Fru Investment Definitions from Investorwords.com
- Stock: “An instrument that signifies an ownership position (called equity) in a corporation.” How much of the company you own depends on how many shares you own. You can profit from owning stocks in a couple ways:
- Dividend producing companies that pay you part of their profit quarterly or at the end of the year.
- Companies that reinvest your money back into themselves and when the stock gains in value, you can sell them for a profit.
- Bond: a loan you make to a company or the government that pays you interest until “maturity” (the end of the time frame in which the bond is set to be paid off) or until it is “called” (when a company cancels a bond before maturity and pays back all principal). Depending on the kind of bond you buy you can receive interest payments monthly, quarterly, or all at once along with the full principal when the bond matures (called zero-coupon bonds).
- Mutual funds: a package of investments (generally stocks and/or bonds) bundled together and sold like stock. The funds are paid for by multiple shareholders who receive returns on all the investments contained in the mutual fund. Benefits of mutual funds include diversification and professional money management. By buying shares of a mutual fund you are receiving ownership in many different companies, not just one. Mutual funds offer choice, liquidity, and convenience, but charge fees and often require a minimum investment.”
- Index Funds: An index measures the overall performance of a series of companies, such as the Standard & Poor’s 500, Nasdaq, or Dow Jones. An index fund is: “A mutual fund that tries to mirror the performance of a specific index, such as the S&P 500. Since portfolio decisions are automatic and transactions are infrequent, expenses tend to be lower than those of actively managed funds.”