The bad news: You are not going to consistently beat the market by buying and selling stocks at just the right time.
There are thousands of folks paid millions of dollars to read articles, magazine, and statements to understand financial markets. They meet with their colleagues, create evidence-based predictions, and pursue strategies to beat the market. These folks are aware of trends and collectively have intimate knowledge of the businesses they invest in based on hard work and years of experience in their fields. Sometimes they beat the market, and sometimes they get thrashed.
Individually, no one beats the market consistently. Collectively, though, markets typically rise over time as the money invested is used to grow businesses, create efficiencies, and make business owners rich. As with all stock market investing, there is risk – you could lose your investment, and its value goes up and down over time.
The good news: You are smart enough to work with people smarter than you – traders, researchers, analysts, financial managers.
Follow the index. Buy exchange traded funds (ETFs).
Index investing can be an inexpensive, tax-efficient way to invest in the stock market without picking individual companies to invest in. With an ETF, you are buying a stock that represents a basket of assets from hundreds or thousands (depending on the index your fund tracks) of companies, many of which have solid valuations and track records. Investing in index funds can create a diversified portfolio, and the fees to hold these stocks are low because their maintenance is based on tracking an index accurately, not the active buy-and-sell calls of managers trying to win gains (mutual funds and other actively traded funds fall into the latter category).
For example, if you buy an ETF that tracks the S&P 500, the stock you’ve bought owns shares in companies that make up the 500 companies in the S&P 500. If the index (the cumulative value of all the companies) goes up, the value of your stock increases. If the index goes down, the value decreases.
Rather than spending all your time and effort trying to find efficiencies in the market and determining how to time a sale of stock, if you buy ETFs, you’re piggybacking on other people’s expertise and the movements of many companies, instead of just a few.
The Fancy Frugal Gay approach to investing relies as much as possible on other people who are smarter than you at making solid decisions in financial markets. If you can delegate this decision-making to the professionals and set your investments on autopilot, all you need to do is choose ETFs based on your risk tolerance and keep buying more of them with your savings over time.
Rather than just relying on value (i.e. your stock’s price increasing over time), many ETFs also pay dividends. This means you get paid money for the pleasure of holding these investments on a regular basis, even though the value of the ETF rises and falls over time.
I think of it as turning your money into staff. Your money should work for you once you have it invested. Your money-staff can get to work, earn you dividends, and those dividends become more staff who will also work for you when you use them to buy more ETFs, and so on. There are many inexpensive platforms you can use to buy and hold ETFs – my current favourite is Questrade (a bit DIY and fun to learn how to trade), and I’ve also enjoyed Wealthsimple (great user experience, super easy to manage and view your investments).
If you can continue to earn money while working a day job, it means you now have two sources of income: your own labour and the labour of your invested money.
The goal is to have enough money-staff working for you that you can give up your day job and focus on other pursuits. What would you do if you didn’t need to bother with a day job?
Fancy Frugal Gay 