*** This Article is Not Financial Advice ***
Introduction
Building wealth is something nearly every person I meet wants to plan for and achieve. I often get asked, both on social media and in person, how best to start investing in the stock market, or into crypto. This is happening even more frequently, now in July 2021, after the incredible bull runs for both stock and crypto. If this is your situation, then this article is for you.
If I’m honest, I’m always a tad bit hesitant because the time when I get asked the most is when stocks and Bitcoin are flying high and the prices are expensive. Mentally, I think, the odds of seeing good returns into the future are now lower, and the time to have started was when you were so happy and elated you were not in the market.
Investing is a strange beast, we all want to be good at it, but it often requires us to go against our natural instincts. This is to say, if you want to be super good at investing, you might need a touch of crazy and buy when others think you’re stupid, and sell when others think you should be leveraging your house to buy more. Regardless, it will definitely require you to hold steady and not panic when the bear markets come around.
But, What if I Missed the 2020 Bull Run
First, Budget
The first step to building wealth is to master the art of budgeting. This will take at least a year to master because you need to experience all the seasons, holidays, and random demands on your money; not to wish ill on you too, but hopefully an emergency or an unforeseen expense to battle test your budgeting skills. While some of these are a net negative, it is important to learn these budgeting and finance lessons as early as possible.
My recommendation is to start with one of the reputable budgeting apps such as mint.com and begin to track your income, expenses, and setting goals so you create a monthly surplus you can invest. Strive to generate a 20% surplus that you could invest, but do not settle on anything less than 10%.
Personally, I use Excel, but this is more from tradition and habit from doing this for so long. I only point this out so you know it doesn’t need to be complicated or intense. Just list the categories, planned and actual expense beside them. Nice and easy.
Second, Set Your Goal, Plan, and Commit
After you have your budget in place, and you believe you have control over your incomes and expenses, it is time to start crafting an ambitious wealth goal. Each of us is unique, with different motivators and goals, but set something that is uniquely yours and can really drive and motivate you.
For example, personally, my current big goal is that my brokerage account is equal to or above $2.4M by the time I’m 52. This gives me a timeframe that is now only 9 years away and also helps motivate me to pick up more assets when they get cheap. Yours will be different and unique to your situation.
Another goal of mine is to own at least 3.0 Bitcoin before Jan, 2030. As this will be difficult to achieve, anytime the price dips hard I get motivated to step in and buy more because it gets me there faster.
I recommend, especially when you’re starting out, to have a 5 or 10 year goal which will motivate but you could achieve in a medium timeframe. Sure, have a longer term retirement goal, but having a medium term goal layered on top can be very motivating.
Third, Build Your Emergency Fund
Simultaneous to our efforts to investing and building your wealth, we need to also build up our emergency fund if you don’t have one already. If you have one skip over to #4. This helps prepare us for emergencies so we can better adhere to our budget and not have to sell our investments early. I have a terrific post on how much you need for your emergency fund. It can help you determine exactly how much you should have and if you need a 3 or 6 month fund.Build Emergency Fund vs. Invest?
This is a common question: should you build your emergency fund first before investing, or start investing and build your EF at the same time? I asked this question on twitter, and I got some interesting responses. My personal favorite response was from @ThumbsUpFinanceIt’s more unlike my situation in some ways. I would say 50/50 roboadvisor and emergency savings until 3 months expenses saved. Then go all in on the robo, or split with saving for big expense (house/vacation/kids). Can always move robo to active later.
— Thumbs Up Finance(@thumbsupfinance) June 29, 2021
Half and Half Approach
To put a finer point on it, save half of your monthly investment money towards your emergency fund, while the other half goes into your investment account. Then, once it is 100% funded, put 100% of your investment money into your investment account.
Fourth, Invest in Index Funds
The studies are in, and the vast majority of investors would do best by investing in index funds and save the stock picking for someone else.
I think a terrific idea, especially for those just starting, is to use a robo-advisor service such as WealthSimple or Betterment. They will handle all the buying and selling for you in the background and create a well diversified portfolio you can be confident in.
If you’re an American investor, your have options galore! My good friend Jesse, over at The Best Interest, has an in-depth review for 10 brokerage accounts. Pay particular attention to the robo-advisor section.
If you’re a Canadian investor, my friend Vibrant Dreamer has a terrific review of WealthSimple Invest and how it all works.
Customized Portfolio
One of the best things about these services is they will tailor fit a portfolio to your risk and goals. This portfolio will include domestic stocks, international, emerging markets, bonds, and even precious metals if you’re with WealthSimple.
Sample Growth Portfolio
This is how a growth portfolio with WealthSimple looks for Canadian Investors and the performance since 2013.
Table Summary: While not as impressive like some crypto, these are still solid returns that would yield tremendous returns if left to compound. Also note, that 1 year return is not typical and highlights the profound upward surge in the market after the March 2020 low.
Rebalancing is Key
One key benefit of the robo-advisor platforms is their portfolio rebalancing service. This means when a particular asset class rises or falls from the target allocation, they will buy or sell the ETFs within the portfolio to bring things back into balance. This is a key benefit and hallmark of a well diversified portfolio.
Fifth, Jumping in and Getting Started
Alright, now this is where it gets interesting because now we are going to start deploying capital and entering into our positions. We are going to divide this section into two smaller sections. First, if you have a large portion of cash and capital to deploy. Second, if you’re starting straight from zero.
Again, nothing here is advice, or what you should do, this is only what I would do if I was starting to invest in July 2021.
Scenario 1: We Have Capital To Start With
Right out of the gate, I would deploy 20% of the capital base. Next, I would take the remainder and divide it into equal portions and commit to investing this remaining 80% just before Christmas 2021. I want to have some capital remaining past October, which is seen as a bearish month given its history for both the 1929 and 1987 crashes. Even if you don’t believe in market voodoo and superstition, deploying the capital over the course of 5 to 6 months is how I would approach it to spread out my entry risk.
As I’m deploying this capital base, I would also include the amount I’m saving and adding from my monthly budget. I would also want to invest at least twice a month during this timeframe and wouldn’t even shy away from weekly. Especially when transaction fees are free.
What we are trying to do here is spread the timing risk and ensure we don’t get in at the top. For complete disclosure you need to know there are studies that show simply deploying all of the capital at once is often the best choice, but I feel the 2021 market is so top heavy, the risk here justifies a cautious entry and a DCA strategy here is a good idea.
Value Cost Average Alternative
Another idea you could use to deploy the capital is Value Cost Averaging and I have a terrific blog post on that very topic that was recognized by Financial Alien for being unique, effective and a fresh take on cost averaging.
Scenario 2: I have no starting capital to invest
Crypto
Many of you will know I’m a passionate advocate for cryptocurrencies such as Ethereum and Bitcoin. I haven’t mentioned it yet because in reality its not really required in order to build wealth and achieve financial freedom and goals. Many have done it before and many will do it after with zero exposure to crypto.
However, this being said, and if you’re so inclined or curious, read my article on why investors should hold Bitcoin and allocate 1-2% of your portfolio into that one and only cryptocurrency.
If you’re a staunch opponent of the asset then pretend you never even read this! However, if you’re curious, then give that article a read.
Sixth, Support
One of the most important aspects of wealth building, especially when you’re getting started, is the stabilizing influence of someone who has been through this before. This may not sound relevant at this time, but when the market corrects or crashes the positive influence this will have on your investing goals and aspirations cannot be understated.
Seeking, and getting support through a crash is essential. If you have this through family or close friends you are among the few. I’m not kidding. Having a family member (or trusted friend) with an aggressive yet calm investing approach is seldom and rare. If you have such, you know what I mean. Ask them, what were they doing during March and April of 2020 and you will have your answer.
Purpose of My Wealth Money
I started My Wealth Money with two purposes. First, share my investment strategies and approach that has worked well for me for the last 18 years. I believe they are timeless and they will work for you on the long term basis. Second, provide support and reassurance during a downward market and crash. We all need to go through tough markets and stock market crashes to reach our financial goals. It really is part of the game and a necessary “gauntlet” if you will. On top of this, bear markets and crashes offer singular opportunities to grab assets at a discount from retail investors who are running scared.
Now, I know that last statement may sound predatory and mean, but you’re providing a service by offering your cash when the demand for it is spiking. While they are screaming and panicking, we calmly offer our cash in exchange for their assets and take the prevailing asking price.
So the true value of my twitter feed, and blog site, won’t really be shown until we hit the next bear market or crash. I will share with you just how badly I’m bleeding along with you, and when I’m entering the market and buying up shares. I did this earlier in the year when Bitcoin was crashing and told my followers when I was entering in and buying the dip on the way down.
Reach out to me on email, follow me on twitter, or subscribe to my blog for weekly updates and posts.
More Sixth, More Support
I can’t over emphasize the importance of support and community when you’re investing. Having someone to reach out to and grabbing onto a strong hand can make all the difference. Knowing someone else is experiencing the same market crash along with you and is choosing to stay the course with their investments can help you stay the course too.
If you don’t have a twitter account, I want you to consider opening one and following myself, and the four people below; if you have an account please make sure they are on your follow list. While their allocations and indexes will be slightly different from yours and each other, the principles of consistent savings and putting it to work in the market is the same.
They support me daily and lend that constant yet calming voice of reason as the market goes up and down each day.
Click their image to get their twitter landing page
Wealth Building Conclusion
I hope these ideas and steps of what I would do have given you some ideas of where to start investing if you are sitting on the sidelines and wondering what to do. I understand the challenges of starting in July 2021, where all the indexes and stocks are hitting all time highs each week, inflation could take off, you don’t want to be holding cash, but you also don’t to buy in at the top.
I’ll leave you with this bonus data point that I hope will confirm you have merit to your concerns, but with a well thought out investment plan and commitment to see things through you will come out on top.
Bonus Material
NASDAQ and the .Com Bubble Crash
I’m not sure if you’re old enough to have experienced this, but during the late 90’s the internet was all the rage and everyone was piling into the latest and greatest internet and e-commerce websites. Many companies were IPO’ing and few, if any, even made revenue let alone a profit. Investors didn’t care, because the idea and concept of the internet seemed so promising.
March 10, 2000 saw the NASDAQ hit its top and it was all downhill from there. By the end of 2001, trillions of dollars of investment capital had evaporated. I personally know a few people who got absolutely burned through this crash and nearly lost their homes. They sold out and never returned.
So it has always been in my mind all these years, what if they had held on and seen things through? Let’s find out:
NASDAQ Investment Simulation
Initial investment: $10,000 into the NASDAQ composite QQQ ETF
Monthly contribution: $200
Start Date: March 2000 (Market Top)
Assumptions: No taxes, dividends reinvested, no transaction fees
Plan: Stay the course, no deviations, just keep adding $200 a month
Diversification: No, just the US tech heavy index. (Something that should never be recommended)
Image Caption: Final portfolio balance is $484,607. Fixate on the 2000 to 2014 year pattern as it will be commented on below.
Image Caption: The first 3 years were extremely tough, losing year after year and then 2008 was the worst single year. You would be right to question your investment. However, these years gave you the chance to build that base and buy the shares on the cheap that would later skyrocket.
Image Caption: The index took until 2014 to return and recover back to the March 2000 high, however because of continued contributions and investments the cost base was lowered and showed positive returns sooner. Powerful lesson here. Look back at the chart for 2000 to 2014.
Image caption: Extremely volatile, and the bulk of the returns came in the last 10 years after the base was formed during the first 10 years.
QQQ Simulation Lessons
- We need diversified portfolios (e.g. don’t just invest in tech)
- Base your portfolio on the best economic research not the latest fads or investing themes today
- Invest for the long term
- Keep our fees low so we can invest for maximum timeframe
- Resolution to stick to the plan is paramount
- Resolution to stick to the plan is paramount
- Resolution to stick to the plan is paramount
While I Have You
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2 comments
So much wisdom and knowledge in this article! Thanks for sharing your thoughts! I am a big fan of DCA but I don’t have too patient so whenever there is money, it won’t last long before being invested. At least now, I have more channels to diversify rather than just putting money in the market! Crypto is awesome!
Thanks much for mentioning my Wealthsimple Invest review!
Hey Vibrant – I loved your WealthSimple review and thanks for your terrific feedback on this article!
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