How To Double Your Money In The Stock Market
If you’ve read any personal finance books lately, what I’m going to share with you isn’t new information. And it isn’t rocket science. But I do want to caution that this is not a get rich quick scheme. What I’m going to share with you in this post will double your money. However, it will require a good understanding of market fundamentals, conviction to ignore the noise and most importantly as I stated earlier, patience. This website isn’t called Financial Tortoise for no reason. You can build wealth, but I believe one of the best ways to do it is to do it slowly.
Common “Misconstrued” Views Of The Market
But first, let’s start out with what I view as several “misconstrued” views of the stock market. You yourself might be well informed about the fundamentals of the market, however, to be honest, if you are, you are actually in the minority. The majority of people out there don’t know the fundamentals of investing or the stock market in general.
This is the primary reason I wanted to write this post. Because I believe that is where it starts. Knowing the fundamentals of the market is the key to being able to invest large sums of your money over time, with the confidence that you’re not doing something to jeopardize your financial well being. So what are some misconstrued views of the market?
One group are those that believe the stock market is just a big roulette wheel. They believe that the market is rigged and Wall Street is out to get you. So it's best not to play at all. Keep your money in a safe and secure savings account. Or better yet, in a shoebox hidden under your bed.
The second group of people are the ignorant investors. They just do what the so-called professionals tell them to dfo. When they started their job, they just checked some boxes for their 401k and haven’t looked back. When a smart sounding investment professional tells them to buy into the latest hot stock, this group asks, where do I send the money?
The third group of people are extreme individuals stock pickers. They don’t believe in mutual funds or index funds. They do their own research to pick winning individual stocks. They have an array of stocks in their portfolio. Google, Tesla, Apple, Gold, Diamonds, Corn, Rabbit Foot, you name it. They have a lot of reasons why they believe their pick will make them millions in the future.
All these approaches make sense. I’ve been in all these groups at least at one point in my life. But the sad fact is that all these approaches are wrong when it comes to effectively making money in the market. Each represents a lack of knowledge, or a false belief of knowledge about the market. Therefore, let’s step back and get a good understanding of the nature of the market so we can have the confidence to invest knowing we aren’t doing anything foolish.
Yes, investing in the market isn’t the only way to secure our financial future. There are tons of other ways to do that. Investing in real estate. Starting a business. Or winning the lottery. However, from my personal experience, and what research says, for the majority of people, it is one of the single most effective ways to grow and double our money in the long run. Especially with very little effort on our part.
Stock Market 101
So what is the stock market? Or better yet, what is a stock? A stock simply is a slice of a company that you own. When you own a share of the stock, you have the right to attend the company’s shareholder meeting, vote on company decisions, and importantly, you have a right to a share of any future earnings that company makes. This share of earnings is most commonly called a Dividend. And as a partial owner of the company you reap the financial benefit of the company’s success. The success formed by all the hard working individuals within a company creating great products, serving their customers and making great profits.
Yes, is there volatility with owning a stock? Of course. And this is because there is so much money to be made in the stock market that everyone has an opinion of how a company will perform in the near future. And these opinions often drive the short term ups and downs of a single stock. Or even a group of stocks. However, the true value of the stock is based on the fundamentals of the company itself. Its products, service and most importantly, profit. Therefore in the long run, all the speculation and volatility are background noise. The value of the stock will go up as the underlying company’s profit goes up.
And for a company with strong fundamentals, profit will go up because of the natural ingenuity of hardworking individuals. They will continue to find efficiencies, create better products and in the long run, advance the market’s ability to serve people. Could we enter a time when the market completely crashes and we are no longer advancing as a civilization? Of course. But based on the fact that we are still flying around in planes and Amazon is still delivering boxes of goods to our door on a daily basis, I like to believe that we have a long way to go before we start worrying about the world ending.
Alright, you might be thinking at this point, I get it Tae. Buying stocks sounds like a great strategy to double my money and grow my wealth, but what stock to buy? How do I identify a company with strong fundamentals? One with great people who will make profits in the long run and in turn help me grow my wealth? Do I buy Tesla because that is what everyone is talking about? Or maybe Apple because I love apple products? Or go with something more traditional like General Electric. Well I’m going to make your life very easy for you.
Buy Everything
Don’t worry about picking the right stocks, just buy all of them. This is the simplest, yet the most crucial part of making money in the stock market. The best minds in finance have done many studies on this for decades. They’ve compared individual stock picking against the market. They’ve compared actively managed mutual funds against the market. And what they consistently find is that the best way to make money in the stock market is to simply buy an “Index Fund.”
A passively managed mutual fund that automatically buys appropriate ratios of every major stock in a given index. No guessing of what stock is better than another. It just buys everything. One of the main reasons why index funds win in the long run is that it follows a predictable and automated set of rules when buying stocks.
There is no highly paid funds manager trying to pick winning stocks for his or her latest actively managed mutual funds. On any given day, there are literally thousands and hundreds of thousands of people bickering over the correct value of each stock. One is saying this company is the next Apple. Next person is saying, no its the next Enron. The truth is that some may be right. At some time. But a lot of them are wrong. And most are wrong in the long run.
What’s great about buying index funds is that it essentially represents the average performance of all these bickering. Noone can predict a company’s performance and therefore the market’s performance. Only thing we can predict is that our index will represent the market’s average performance as a whole. So if we want to effectively make money in the market, we can by picking the index fund with a broad diversification and with the lowest fees.
You might be asking at this point. Alright, I hear you about index funds. But if that is right, how come the only thing I hear about when it comes to making money in the market are the hot stocks and high performing fund managers? The reason is identical to why places like Macau and Las Vegas continuously thrive. Despite what data says about gambling or trying to pick winning stocks, we humans are irrational and emotional beings.
We can’t help ourselves but believe that we are smarter than we actually are. Just ask my wife. In the world of investing, the surest way to win is to use statistics for our benefit not against us. Therefore when we buy the market average, aka index funds, we are increasing our probability of winning in the stock market vs trying to pick winning mutual funds or winning stocks.
VTSAX: One Fund To Rule Them All
Alright, at this point you might be thinking. I get it. Don’t think I’m smarter than the average and just buy the average. Buy index funds to make money in the market. But then what specific index fund? Great question. And I have another very simple answer for you.
My personal favorite and the king of all index funds, the Vanguard Total Stock Market Index Fund also most commonly known as VTSAX. With assets under management of $1.2 trillion dollars, it is the most popular and biggest index fund in the market. And it is the only index fund that is in the trillion dollar arena.
The fund aims to track the CRSP US Total Market Index. CRSP stands for Center for Research in Security Prices and is part of University of Chicago’s Booth School of Business. It probably is the most comprehensible total market index that includes around 4,000 companies across mega, large, small and micro capitalization.
And thus at the time of this post, VTSAX represents approximately 4,100 publicly traded companies. It has an expense ratio of 0.04%. Which means if you have $10,000 invested in VTSAX, you are essentially paying $4.00 for Vanguard to manage this fund for you.
If you can believe it, actively managed and even some passively managed funds charge 10-20 times higher fees. VTSAX has a minimum investment requirement of $3,000. Though the original fund started in 1992, it’s gone through some variations since and as of the latest face lift in 2000 the fund’s average annual total returns has been 7.67%.
If you want one fund to rule them all, this would be it. It not only represents Big boy companies like Apple, Amazon and Microsoft. It also represents thousands of lesser known ones as well. When you purchase VTSAX, you are essentially buying a piece of every one of these companies.
Case Example: Doubling Your Money
Alright, now that I spent enough time talking to you about concepts and theories, let’s actually see this strategy in action. Let’s see if this strategy can actually double our money. Let’s wind the clock back 10 years to the year 2012. We are now recovering from the recession and you have scraped and patched together $10,000. You want to grow your money, but you want to do it confidently.
Thankfully you heard of this guy named Tae who had a great recommendation of investing in VTSAX. He looks a little funny, but he has amazing hair, so why not. I know this scenario doesn’t make sense given this website didn’t exist in 2012, but bear with me for this example.
In September of 2012, VTSAX was trading for about $35 dollars a share. You open up an account with Vanguard and park your $10,000 in there. Now let’s say life happened and you forgot about your investment. You got married, had kids, got a new job and traveled the world.
It’s now 2022 and as you are going through your finances, you remember that you made a $10,000 investment in VTSAX a decade ago. Given how the market’s been doing the past year, you are hoping your $10,000 is still intact. Or at least didn’t lose too much of its value.
How much do you think you would have in your account? It’s not $10,000. It’s not $20,000. It’s actually close to $28,000. As of this post, VTSAX is trading at around $97 dollars a share. Your money not only doubled, but close to tripled in a period of one decade.
Now I want to highlight a few things here. This didn’t just happen because of an accident. It happened because you as an investor followed some key principles. One is that you understood the market fundamentals so you bought a low cost index fund. However, the second principle is that you ignored all those noises of ups and downs. Now in our example, this happened accidentally but you get the point.
A lot has happened in the past decade. Donald Trump was elected President. COVID 19 struck the world and Russia invaded Ukraine. However, despite all that the market went up in the long run. And this leads to the third key principle. Patience. You held it long enough to reap the benefit of the market.
Whenever major events happened, the market responded. Most often with sharp declines. However, in the long run, it recovered. And that is why when you invest in the market with long-term in mind, you will not only double your money, but triple and even quadruple in the long run.
