Some Essentials on Raking in Oodles of Cash



So you’d like to make a killing in the stock market, would you? If you read April’s post, you’re probably feeling all kinds of confident about the basics of stocks and market indexes, but how do you actually rake in oodles of cash? As fun as get-rich-quick schemes can be, it’s actually the get-rich-slowly folks who come out on top.

Hold back your groans of impatience. "I need money now" is a mentality that will only get you into trouble—ask any bank robber. When it comes to money, time is the most valuable thing you’ve got, so it would be prudent to learn the art of waiting. It’s true; largely due to the micro-wave oven, our society is finding it harder to be patient. Why would you slave over family recipes when you could enjoy the instant gratification of microwaved break-fast, lunch, and dinner burritos? But in terms of saving up a gargantuan nest egg, slow and steady wins the race.

So let’s first debunk something you may be tempted to do. There’s no doubt that at some point in your life, you’ll cross the path of a friend or neighbor who will brag about some hot stock he just bought, and yada, yada, yada, how analysts only expect its value to skyrocket. And sure, the thought of making some quick quid peaks your interest. You’re only human after all. BUT, this is a risky way to use the stock market. There’s a small chance you may hit it big, but most likely, you’ll end up sad, alone, and without money. Some people do get their kicks and giggles trading individual stocks throughout the day, but if your end-goal is a big ol’ wad of cash for, say, retirement, then picking individual stocks generally isn’t the way to go.

Last month you learned that you could buy ownership in a little slice of a company, i.e., purchase a company’s stock. By doing that, you might get a bit of their profits, and you’re hoping that you can sell them to someone who’s willing to pay more than you did originally. Let’s say that 10 years ago, you used all of your money to buy shares of Enron stock. Well, today you wouldn’t be a very happy camper. When companies go out of business, shareholders lose their money. You never know when a company has been built on sand, and could lose its value in a landslide. You’d hate to have your life savings go down the toilet with it.

Let’s say, instead, that you put all of your money into 10 companies. One of them pulls an Enron and loses all of its value. Bummer, sure; but guess what? You also own stock in 9 other companies that happen to be doing extremely well. All in all, you might not have lost very much money. (Keep in mind this is all on paper until you actually sell your shares).

So what if this principle were magnified, and instead of owning stock in 10 companies, you owned stock in 500 of the largest U.S. corpo-rations? Well, then if one of them went under, there would be no need to flip out—499 of them are doing just fine. The trouble with owning just a few companies is that there is no way to tell which of them will end up on top, and which ones will end up like Enron. The solution: own as wide a variety as you can, take the whole lot, diversify your portfolio, or as this guy John Bogle once said, "Don’t look for the needle in the haystack, buy the entire haystack."

Now, you may be thinking, "I’m not Oprah. I can’t afford to buy all this hay." And it’s true—if you were to go directly to those 500 companies to purchase their stock, they’ll probably make you buy at least 100 shares, you’ll have to pay fees for them, and it gets more and more unpleasant for your checking account the more you buy. BUT, here comes the magical solution: MUTUAL FUNDS! *Cue the Hallelujah Chorus*

Let’s say that you and a million other people pool your money together and give it to a professional money manager (a mutual fund company). The manager of this company (hopefully) knows a lot more than you do about investing in stocks, bonds, real estate, and other investments. And depending on which mutual fund you pick and what objective that fund has, the manager will use that big pool of money to buy various types and combinations of stocks and other assets. You may be interested in only growth stocks, or in only one sector of the economy, or perhaps you’d like to purchase every stock in the U.S. market. With over 8,000 to choose from, picking a mutual fund that matches your investment goals is easier than microwaving a breakfast burrito.

In the end, you may hand over $1,000 to this mutual fund com-pany, and instantly have access to hundreds or even thousands of different companies’ stocks. Of course, this manager isn’t a charity worker, so you will have to pay something for his/her services, but there are many, many funds out there that charge very little for expenses and fees.

Now, unfortunately again, there is simply not enough room in one newsletter to cover all the ins and outs of mutual funds, but suffice it to say that mutual funds can be an easier, safer, cheaper way to invest for the long haul. The earlier you start, the better. This is how people make millions in the stock market. It’s not some hot stock that you flip in a couple of days. It’s buying and holding on to the entire haystack!