Stocks: The Simplest Legal Way To Make Money In The World?

By Keith C. Milne

If you’re like most people, you love making money. Especially when you are paid well for doing less than you thought you would have to in order earn that amount of money! And why not? I’m certain you have heard the term “let your money work for you,” or “put your money somewhere where it will work for you for a change,” or similar. I know I certainly did as a young man and still do today. Well, I have never come across an easier legal way to make money than by carefully and thoughtfully investing in stocks!

I am not an investment advisor of any kind nor do I do money managing of any kind or for anyone else whatsoever, nor am I licensed to do so anywhere. However, I do know what has worked for many other successful investors, some of which are the most successful of all, like Warren Buffett. After reading some books about finance and investment, and books about how Warren Buffett, Peter Lynch and others like them made their money, I decided to mimic some of this new knowledge or indirect mentoring, and put it to use for my own benefit. The idea came to me in one of the books I read, and the concept was that if you wanted to make a lot of money, then that goal could be accomplished by mimicking the way another successful person made their money! Hmmmm . . . go figure! What I learned and then implemented for myself has worked very well for me over the last 30 years as well.

It seems so simple: investing cash money so that at any time after investment in the future, the balance will be greater than what was originally invested. In the case of simple, ordinary bank savings accounts, this is called earning simple interest.

I know it still feels safe to you when you put money into your savings account. I get that, it feels the same way to me. It’s a good idea to have a rainy day fund for emergencies of at least six to eight months salary “just in case,” and a vacation/gift fund sitting in a savings account earning as much as you can get on that type of investment. I use Ally Bank they currently pay 0.5%, next is CapitalOne Bank currently paying 0.4%, both pay higher by as much as 10X over other banks.

Beyond saving cash for emergencies, vacations, and gifts, the earnings price you’re paying for not putting new savings money into stocks is steep. If you want to have plenty of money to fund your kids’ college education or your retirement, you need long term earnings that will get your goals accomplished. A mix of different, but simple investments will get you there and will be safer than you think. However, missing out on the gains from stocks, particularly if you’re young and have a ton of time on your side, is unnecessary and will do much harm to your overall financial picture in the long run, even taking volatility and down market periods into account.

Looking at the S&P 500 for the years 1991 to 2020, the average stock market return for the last 30 years is 10.72% (8.29% when adjusted for inflation).

Looking at that same time period 1991 to 2020, the savings account rate in the U.S. ranged from a high of nearly 6% in 1991, down to 0.05% as of 2021.

Stocks: 10.7% Savings: 3%

I can almost hear you saying something like, “yeah, sure, I get it. Invest in things that will grow and make some money. It would be nice if I had the money to do that with. Heck, I don’t even have a savings account or a rainy day fund yet, let alone enough to also be investing in something as luxurious or exotic as the stock market. Besides, even if I did, I wouldn’t know how to do it, or trust that I would not lose my shirt trying to do it, and there is no one I trust who would help me with this.”

Well, the single biggest bit of advice that I read regarding money management that has stuck with me and worked for me fabulously is the concept of paying myself first. This is a way to make money materialize seemingly out of thin air!

Paying yourself first. This concept is critical but very simple: you treat your savings and/or investing as if they were a bill or an invoice that is due and payable every payday! In other words, the first bill that gets paid every payday is your savings account or investment account. When I first learned this principle, I used simple math to figure out how much this “bill” would be every payday. It was my annual IRA contribution limit for the year, based on my age at that time, divided by 26 pay periods, which was the number of pay periods over the course of a year. Brilliant! I loved it. It forced me to think a lot more about money in general and, more specifically, forced me to think about my relationship with money both past, and present, and want kind of relationship I wanted to have with money going forward.

Initially, when I was in my twenties, I opened my first mutual fund account at Twentieth Century Investments, later to be renamed American Century Investments. Every single payday I sat down and wrote a check for $76.92, which was my annual IRA contribution limit back then of $2000/yr divided by 26 pay periods. I wrote those checks every two weeks and mailed them in and added them to my mutual fund and watched the balance slowly but surely grow. I saw how the balance grew rapidly by me adding to it regularly, but also through share price appreciation or the price of shares of the mutual fund I had invested in getting more expensive (valuable) over time.

I loved the discipline. I loved how it made me feel to have an investment finally working, and one that gave me automatic diversification across multiple sectors of the economy with some of the largest and most profitable companies ever to come along in the history of the United States of America. It was awesome then, and still is today.

This new found discipline with money became the springboard to other new and improved financial behaviors for me. I simultaneously began to forgo eating out as much as I used to, stopped buying music CD’s as much as I used to, said goodbye to my longtime bookclub membership, and reacquainted myself with my local library.

I used the savings to boost my “rainy day fund” to a proper level. Back then, most financial advise seemed to agree that having six full months of expenses saved up and available as cash was the magic amount to keep someone afloat who lost a job, had a major medical event, or any other thing that could cause a sudden loss of income. Today, this number is still valid, but conservative. Now that we’ve all seen what an extended lock-down from a pandemic can do to supplies, employment, housing, and the economy, eight full months of salary is a better idea, with a full year as an end-game amount to have available and treated as untouchable.

I’m sure you’ll find that paying yourself first is simply amazing. It’s almost as if money appears seemingly out of thin air. Once you make room for the new bill called “my savings,” everything else will adjust itself to the new paradigm.

When I began paying myself first, becoming aware of my money at a much more conscience level over time made me realize how much I was wasting on frivolous, meaningless, fleeting stuff that would just end up in a landfill in short order. Without this new awareness and “new found money” I likely would never have discovered just how lucrative the stock market and other money vehicles could be, because I would have continued carrying on believing that I couldn’t afford to be an investor of any type. See what a vicious cycle our self-defeating beliefs can be? I could’ve also chosen to go out more, or drink a lot more beer, but thank goodness I chose to wise up and get started on something that I knew in my gut would someday pay me back handsomely.

It’s important to take this step and have this concept become a habit. It is one that will serve you WELL for the rest of your life and, once formed will always prompt you to set aside a little bit of your income for later in an automated way.

Stocks: reward comes with risk, but no risk generates no reward! You must be invested in some vehicle that earns money beyond inflation in order to accumulate more.

Generally, the higher the risk the higher the reward, but sometimes the higher the risk the bigger the loss! And, therein lies the problem of why so many people stay out of the stock market all together. Do not let risk keep you from investing in stocks. It will always be a part of making money no matter how you choose to do it. You risk getting killed in a car accident everyday if you commute to your “safe office job.” You risk losing your life to malpractice when you undergo a surgical procedure, but you do it anyway. This is no different really. In fact it’s much safer than you think and here’s how to minimize your risk.

If you are just getting started with stocks for the first time, please open a free online brokerage account. Make sure your account is a self-directed ROTH IRA. This way all taxes and tax headaches go away until you go to withdraw the money later at some point, but in the case of the ROTH IRA, any withdrawals as of being age eligible, will be completely tax free!

Invest in Mutual Funds or Exchange Traded Funds (ETF’s) that are index funds that mirror the S&P 500. The S&P 500 is an index fund that is comprised of the largest and most profitable companies in the United States of America. Google, Apple, Amazon, Tesla, IBM, GM, Ford, Honeywell, Nvidia, etc. they are all a part of the index. Buying shares of either an S&P 500 index mutual fund, or shares in the same type of ETF are buying shares of a fund that attempts to mirror as closely as possible the same composition of the S&P 500, and in the exact proportion that each company represents as a percentage comprising this index. Essentially, it’s as close to buying the actual S&P 500 index itself as you can get without buying shares in all 500 of those companies individually! This gives your invested money incredible diversification across multiple sectors of the economy and affords a lot more safety than owning just individual companies.

For example: maybe tech stocks are tanking. If your portfolio is made up mainly of tech, then you’re going to feel the pain while they are down. But, if you own the the S&P 500 index, just because tech is tanking doesn’t mean building materials are, or utilities, or consumer goods, or oil, or automobiles. This is a set it and forget it way to diversify and be in the market and realize SOLID gains over time. “The longer you stay invested, the more profit you will realize. The index has returned a historic annualized average return of around 10.5% since its 1957 inception through 2021.” This is way beyond the current savings rates of 0.1% at the low end and 0.5% at the high end at virtually all banking institutions and, in my opinion, is worth the risk to be in to the tune of most of your investable capital if you still have at least 10 years before retiring.

I initially bought into a mutual fund that was similar, but wasn’t a true index fund. However, my fund was comprised of mainly mid size to large cap growth companies across multiple sectors in a manner similar to the S&P 500. ETF’s hadn’t been invented yet, and buying individual stocks had to be done by and through a brokerage firm when I started investing. Additionally, an investor needed to be able to purchase at least 100 shares of any given stock as a minimum, plus meet the minimum initial amount as a deposit with said brokerage firm. Finally, it was costly to place trades with the fees for trading at much higher levels than would be believed by todays investors. But at least I had good old no load mutual funds back then (early 1990’s).

If you are fortunate enough to work for a company or organization that offers either a 401K retirement plan or, in the case of a government organization, a 457 plan, then you are in a perfect place to put a “set it, forget it, you won’t regret it” plan in place. Put as much as you can into this plan via automatic payroll deduction. Max it out if you can. The limit on your contributions are much higher than with an IRA of any flavor. If you are even more fortunate, and work for a company that matches your contribution in any way you would be insane to turn down this free money! It is profit before you even get out of the starting gate! A “dollar for every dollar you invest,” which is often case with the few companies offering a nice benefit like this, is 100% profit right off the bat! Direct the money going into your account into an S&P 500 index ETF, such as SPLG. This will ensure you are now getting automatic, maximum input investing, into maximum diversification, across multiple economic sectors! You just hit an investor home run! Other than maxing out your rainy day fund, your work is done my friend. When you get older, or if you are already closer to retirement age, you can split your investment amount between the ETF and open a money market, cash account, while still keeping your ETF funded. Just split the amount or percentage of your investment that you want to be deposited into each account. Over time, this will keep you in just the percentage of stocks and cash that you desire. All of it via direct deposit. All of it tax deferred until you retire or take it out in some way. It is too bad that everyone cannot enjoy the same benefit!

The good news for everyone today is that there is no minimum investment amount needed to open an online brokerage account, and the fees for trading stocks in recent years have been reduced to ZERO! I never thought I’d see that day come, but it did! There are NO REAL EXCUSES left for not being invested in the stock market other than getting over your own fear of possibly losing money.

Are buying individual stocks riskier than owning shares of an index ETF that mirrors the S&P 500? You bet! However, equally high is the potential to make even more money and in a shorter period of time. Or, you can mix it up and have both. Buy stocks that you want to own individually, but keep the lions share of your stock money invested in the index fund. Remember, no risk, no reward.

If you decide that you would like to own individual stocks, please Do not buy just any stock. BUY WHAT YOU KNOW!

This is another one of the lessons I learned from reading about the success of others in the financial arena. This one came from Warren Buffett. Buy what you know! Indeed! But what exactly does this mean anyway? What it means is this: If you absolutely LOVE the food at McDonalds and eat at this restaurant frequently, then buying shares of McDonalds stock is buying “what you know.” If you love coming home after work and chilling out during or after dinner with Netflix or Amazon Prime, then buy shares of Netflix or Amazon. Are you constantly amazed or impressed by that new MacBook Pro or iPhone you just got? Buy shares of Apple. Use the same toothpaste or toilet paper all the time? Buy shares of Johnson and Johnson, Kimberly Clark, or Colgate-Palmolive. These companies sell things that people not only love, but use again and again. CONSUMABLES! You see?

Buy stock in companies with brand name recognition and a long history of being in business successfully, earning them a competitive edge and a moat around their business. Starbucks, Apple, Google, Best Buy, Walmart, Toyota, Exxon/Mobil and other “bluechip” stocks are safer overall than buying smaller little known stocks. However, once again, the risk vs. reward comes into play here. The growth of a smaller company could skyrocket on a journey towards becoming well known–think Amazon.com in the early days. Another possibility: that same small company could be noticed by a much larger company and be purchased by the larger company to minimize competition.

Amazon managed to achieve stellar success because it was an industry “disrupter” by doing something no one else was doing or had ever really done before: selling books online, and eventually nearly everything imaginable, and then did it extremely well. The rest is history and so are it’s historical gains. Imagine getting in on that stock when it was at $50/share? It’s at over $3200/share today!

I know this seems like a lot to digest, and I guess it kind of is to the uninitiated, but please take your time and digest the concepts here. There are only going to be a handful and they are so basic, yet they have served me extremely well. At times, I have made lots of money in individual stocks, often, but I also have suffered stellar losses over the years. I have sold stock to free up money to buy what I thought was a more lucrative company that would perform better over time, only to have just the opposite happen. I have learned along the way and I am providing you with what HAS WORKED FOR ME based on readings about what has worked for other, wealthy, successful investors.

Buy stock in quality companies and hold them forever or until you need the money to retire on. The longer the better. The longer held, the more you are going to make.

I bought Amazon over time and at higher prices each time, but all of these purchases have all paid off handsomely. I bought some Amazon shares at $86/share. I bought more at $230/share, and even more at $1475/share! (That was a scary full faith buy!) I have no regrets about buying any of them at any of these prices. I have held Amazon for more than Fifteen years and reaped the reward of the massive share price appreciation during that time.

*Warren Buffett made a small business out of selling Coke when he was 7 years old.

*Buffett first bought $1 billion Coca-Cola stocks after the 1987 stock market crash.

*Buffett likes wonderful brands and he recognized that Coca-Cola is one that has great value and potential.

*With 400 million shares of Coca-Cola stocks, Buffett plans to hold on to his shares indefinitely.

Do not try to time the market by buying stocks when the market is down and selling when the market is up. Again, BUY QUALITY AND HOLD IT FOREVER. Don’t “Day Trade.” Don’t try to guess which way a company, an index, or a market is going to move today, tomorrow, or the next day. Don’t speculate or act like a gambler. Do your homework. Make your choice. Buy your shares and add to them regularly. Do not sell. Rather, get used to market fluctuations and see them as ordinary events, rather than panic attack events when the market is red. It also helps to not check on your holdings everyday. Check once or twice per week AT MOST. If you only invest in an index ETF then you only need to give it a glance a couple of times per year. Looking at your holdings constantly will get you fixating on market losses in particular, then increase the likelihood that you will make a knee-jerk decision only to regret it later.

If want to get started regularly adding to your holdings, whether they are shares of an index fund or shares of individual stock all purchased via YOUR BROKERAGE ACCOUNT, for no fees for the trades, then go ahead and figure out what your annual contribution limit is based on your age. If you’re younger than 50, your contribution limit is currently $6000/year or $230.77/bi-weekly. If this is more than you can afford, I understand, but it won’t be that way forever! Go ahead and figure out what you can afford and write that check or transfer that money via your online account and/or smartphone app every payday and make it a habit. Doing it yourself manually will help doing this to become a habit. However, if you’ve been forgetful, then you might want to automate the transfer by setting up direct deposit into the account, or setup a reminder on your phone or a calendar event that will remind you until it does become a habit.

Investing the same amount every payday is called dollar cost averaging. Some days the shares you purchase will cost more than other days. By investing the same amount every two weeks, the over all cost of all the shares purchased will be averaged between the highest and lowest prices paid for your shares overtime. Your investment money will buy fewer shares when the shares are more expensive, and more shares when they are less expensive. This is preferred over trying to guess the market or engaging in “market timing.” Many before you have tried it. It normally doesn’t work out well for the vast majority of the investors who think they are the special ones who can guess what the market is going to do.

Spend time envisioning the future in your mind. Where are we all heading currently? 5G Cell towers/chips, virtual reality, LIDAR radar sensors, self-driving cars, robots performing manufacturing, and delivering products to us using drones, climate change opportunities-Lithium Ion Batteries, Solar expansion, Wind power expansion etc. then research the companies involved in these emerging areas. Who are the leaders and why are they the leaders? Are they only local or are they global with operational capabilities around the world? This type of thinking will lead you to new movers and shakers and the future disruptors like Amazon. Pay attention to when you get an excellent product or when you experience stellar service on a regular basis. These are potentially companies to put into your “watch list” at your brokerage and perhaps invest in someday. Companies that do products or services better than most are the companies that grow, and they deserve your attention and, ultimately, your investment dollar.

Don’t put all your eggs into one basket! Yes, Please do invest in stocks, you will never make more money any other way. Once you see how easy it can be to make money, you might just get “the bug,” and want to put all of your money into the market or, WORSE, put all of your money on the one or two stocks that have done well for you in the past! Please do not do this. In fact, don’t even consider doing this. Never forget that you aren’t using play money here. This is money that you had to drag yourself out of bed to earn, and money that you hope to have someday to support your tired old bones so you won’t have to get out of bed early in the morning anymore.

The promise of investing is that your money will grow into more money over time. However, as you age, prudence dictates that you should have less exposure to market volatility and potential short-term, significant loss right when you’re about to retire. So, how does one decide how much to keep in the market at any given point in time? It will definitely vary depending on who you are and what your particular situation is, but what I’ve read more often than not, is the following:

Subtract your age from 100. The sum should then be the amount of exposure you keep in the stock market. So, if you’re say, 40 right now. Then 100-40=60. Using this formula, you would leave approximately 60% of your portfolio invested in stocks, and the remaining 40% in cash or other safer vehicle. This is for approximation only. You are always in control. You can make adjustments however, and whenever you please. All of this information is what has worked for others, including me, in the past and present, and might work for you now or in the future.

I will admit that I tried adhering to this formula for awhile, but found I wanted to continue with more exposure to the market and have just the opposite ratio invested myself in the market, or 60% Stocks, 40% cash or other investments. I have been doing this now for just under 30 years and have become fairly knowledgable and confident in my abilities and choice making regarding investing and my own personal money management style.

So, mix it up a bit. Stocks (ETF index funds and individual stocks), High-Yield CD’s, Municipal Bonds, Bank Savings.

To summarize:

1. Get used to paying yourself first by funding a rainy day fund until you have a minimum of six months of your pay in cash set aside as untouchable just in case of a long period of unemployment or in case you need a large sum for a repair or a medical incident or similar.
2. Open a self-directed ROTH IRA at the brokerage firm of your choice. Your own bank might already offer brokerage services. TD Ameritrade offer free trades, no minimum to open an account, tons of investor education, and regular banking services. Ally Bank is, in my opinion, the best bank, period, and offers virtually every banking service imaginable, as well as now offering full investment brokerage services all in one amazing online or mobile experience. Bank of America, Charles Schwab, and Edward Jones also offer similar services.
3. Fund this account by regular, equal deposits every payday up to the legal maximum for your age every year if possible.
4. Buy shares of an S&P 500 index fund, preferably and S&P 500 index ETF, like SPLG. Let these shares comprise the largest portion of your stock portfolio.
5. IF you’re going to buy individual stocks, buy what you know, buy quality companies and hold onto them forever, adding to shares of them via dividend reinvestment, and additional cash investment regularly.
6. Engage in “Dollar Cost Averaging” or regular investments at regular intervals buying more shares of the same investment, such as additional shares of the SPLG index fund. Doing this will buy fewer shares when they are more expensive, but more shares during market down times and when the price is less.
7. Mix it up! Do not put all of your money into any one single investment vehicle.
8. Spend time sitting quietly and thinking about, researching, and reading about what is going on in the world regarding development of new infrastructure, new technologies, new services, new industries, current industry disrupters, or new services, new chains or franchises, or who has continued providing stellar products and services for a very long time without flinching? These sessions will help you uncover new companies to invest in over time.
9. Use your own mind and experiences to guide you as to what to invest in, and when. Don’t buy the stock pick of the week from your buddy at work, or your next door neighbor simply because they swear by it. Instead, see if what they’ve told you makes SOME sense, then do the research into that company’s performance or stats yourself.
10. Investing isn’t rocket science. It is using common sense, information, and money in intelligent ways, then being disciplined enough to be patient and let time grow our money just like the companies we’ve bought shares of.

Investing can be as complex as you want to make it. There are literally armies of statisticians, mathematicians, economists, and con artists out there ready and willing to bedazzle you with all of their charts and stats and metrics and this and that and the other thing until your head is swirling and you have a pounder of a headache.

I have bought what I’ve known and bought what I’ve envisioned about the future and it has worked better than my wildest dreams for me, and it can for you too. But similar to playing the lottery, you must be in the game in order to win at all. You must be invested in order to realize the gains. Do not worry or fret whatsoever about the down days in the stock market. They come every single week, and usually on Fridays, and after the market was in the green all week, and always has been doing this back to the 1920’s!

If you’re young: Dude! start investing now and YOU WILL BE A MILLIONAIRE OR MORE SOMEDAY! NO WORRIES, ONLY GAINS! Don’t take on a second job unless all of the money earned from that second job goes into the stock market!

Here’s to Happy Investing and MANY BIG RETURNS!