Buying our Second ETF
Last month, we bought our first ETF.
As we add to our ETF Portfolio each month, it’s time to buy the second one.
How to become wealthy
The key to become wealthy is very simple:
Spend less than you make
Invest at least 10% of your income in stocks every single month
When the average American household would invest 10% of its income in stocks every single month from the day they start working until the day they retire, almost all Americans would be millionaires. The power of compounding is truly magical.
This also means that the sooner you start, the better.
Another positive? Everyone can do it.
You don’t even need to be interested in investing or spend a lot of time researching stocks.
“Paradoxically, when 'dumb' money acknowledges its limitations, and starts to invest periodically in an index fund, it ceases to be dumb.” - Warren Buffett
The essence of passive investing
The essence of passive investing is very simple: you buy an index fund periodically, for example every month.
You do this consistently for the same amount and on exactly the same date every single month of the year.
By doing this, you don’t need to worry about stock market fluctuations.
This method is called Dollar-Cost Averaging (DCA).
The beautiful thing about this? You buy more shares when stocks are priced cheaply and the other way around.
Let’s give an extreme example to make everything more clear.
You have decided to invest $500 per month in an index fund.
Today, the index fund trades for $100 meaning that you can buy Q 5 for $500.
Next month, the stock market crashes and the index fund now trades at a price of $50. As you invest the same amount every single month, you again buy the index fund for $500 but this time you can buy Q 10 for $500.
The month thereafter, the stock market recovers and the index fund trades at $100 again. In this month you buy the index fund again for $500, meaning that you can buy Q 5.
Here’s how your transactions looked like:
Month 1: you buy Q 5 for $100 (value: $500)
Month 2: you buy Q 10 for $50 (value: $500)
Month 3: you buy Q 5 for $100 (value: $500)
So now you’ve invested $1,500 and own Q 20 of the index fund.
The stock price of the ETF now trades at exactly the same price as when you started investing ($100).
But how much money did you make?
Let’s do the math.
You bought Q 20 for $1,500 (you bought 3 times for $500). As a result, your average purchase price is equal to $75 ($1,500/20).
But how much are your stocks worth today? They are worth Q 20 * $100.
Your stocks are worth $2,000 meaning that you made a profit of $500 or 33.33%. And this while the stock price did nothing since you started!
It’s the beautiful thing about Dollar-Cost Averaging.
When the stock market goes up, the value of your portfolio goes up
When the stock market goes down, you can buy more shares at cheaper prices
This means you always win. Life belongs to the optimists!
Your investment strategy can be visualized as follows:
This also means that the best thing that can happen to you as someone who will be buying stocks over the next few years, is declining stock prices.
The cheaper you can buy stocks, the higher your return will be.
Here’s what Warren Buffett has to say about stock market fluctuations:
So if you remember one thing from today’s article, please let it be the following: lower stock prices are a GOOD thing for you as an investor.
Intuitively, you’ll feel better when the value of your portfolio goes up.
That’s why you should mentally wire yourself to become excited when stock prices decline.
Not convinced yet? You’ll change your mind when you know that stocks are like hamburgers.
Stocks are like hamburgers?! I let Warren Buffett do the talking once again:
Now let’s buy our Second ETF: