Why Everyone Should Invest in the stock market?

A Detailed Look at why investing is inevitable to become or stay rich

5 min readJun 12, 2021

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I’m sure you’ve all heard the term “investment,” don’t you? This tutorial will help you understand what investing is important and why I prefer investing in the stock market over other investment instruments such as real estate.

There are basically three types of people on the Earth . . .

A man with a $50,000 car and $5000 in his bank savings account
A man with a $5,000 car and a $50,000 investment (Real estate, Stocks, etc.)
A man who saves $55,000 in his bank savings account

Being the first type of person is bad because it implies that you are living an unaffordable wealthy lifestyle! A car is a depreciating asset, which means that its value declines over time. According to iSeeCars.com(1), the average car depreciates 49.1 percent in the first five years, with the BMW 7 series depreciating the most, losing 76 percent of its value in the first five years. In fact, the value of your car depreciates by at least 10% the moment you drive it off the lot.

Don’t get me wrong: saving money is perfectly acceptable. But, before I go any further, you can look at one of the most recent CPI (Consumer Price Index) reports from the previous month.

Consumer prices jump 5% in May, fastest pace since the summer of 2008

Consumer prices for May accelerated at their fastest pace in nearly 13 years as inflation pressures continued to build…

www.cnbc.com

Isn’t it shocking? Given that the CPI falls short in a variety of areas. CPI does not account for all prices, and when it is 5%, real inflation is usually at least double the given percentile. It is not my intention to dig deep into the CPI report and the inflation topic today, so I will leave a link below for you to form your own opinions(2).

Using simple maths, the best savings rate you can get from a bank is 0.5 percent, while your money loses at least 5 percent of its purchasing power(3). Even though putting all of your money into a bank savings account is risk-free, you’re still losing 4.5 percent YOY in purchasing power.

Photo of the M2 money supply by Fred on stlouisfed.org

The Federal Reserve is constantly printing money, and the M2 money supply is rapidly increasing. Without a doubt, inflation is always present and will not go away in the medium or short term.

“How do I invest when I don’t know which stock to buy?” some of you may be wondering. Or “Learning to invest is too time-consuming; I could just work harder to make more money.”

Passive Investing

Passive investing, as the name implies, is a strategy for maximizing returns by minimizing buying and selling. But how do I go about doing that? You could simply dollar cost average into the S&P 500 Index each month. It makes no difference how much you invest as long as you do so on a monthly basis.

S&P500 Index

What exactly is an index? What exactly is the S&P500 Index? An index is a method of tracking the performance of a collection of assets. To put it simply, an index is a basket that contains a variety of eggs. The S&P 500 Index is simply a basket that contains the 500 largest publicly traded companies in the U.S.

Yes, there are many criteria for a company to enter the S&P 500 benchmark, and an Index Committee decides which stocks belong and which do not belong in the leading index. So, why scratch your head over picking your own stocks when you can let the “smart ones” do it for you?

What about the returns? How well does the S&P 500 index perform? From 1957 to 2018, the average annual return was approximately 8% (4). Given that it contains 500 different stocks, it is considered a good rate of return, and you will not lose money if you invest for the long term.

How do I invest in an Index? The S&P 500 is an index, but if you want to invest in the companies that make up the S&P, you must do so through a fund that tracks the index, such as the Vanguard 500 fund.

Power of Compounding

After all, an annual return of 8% will not make me wealthy. Why am I wasting my time reading about this? some of you might be wondering.

Well, you shouldn't underestimate the power of compounding. What is exactly compounding?

The act of reinvesting capital gains or dividends to generate more money over time is known as compounding. I’ll provide a link to a website that can help you calculate your compounded investment so you can see what returns you could potentially generate in the future by consistently investing in the stock market (5).

This much money can be earned in about 20 years of passive investing with little to no effort, a starting capital of $1000, and a monthly contribution of $500 assuming an annual compounded return of 8%.

When it comes to investing, there’s a lot more to learn. This is not a get-rich-quick scheme and this is the “lazy strategy” I would suggest to a guy who wants to invest with little to no effort. Feel free to give me feedback on how I can improve my future articles or what topics you’d like to hear about.

Happy Investing!