Perhaps you didn’t grow up in a family that talked about money or investing. If so, you’re not alone. Alonzo Peters, writing from his perspective as an African American, explains that this was the predicament he was in and how he later came to realize the close connection between investing in the stock market and building wealth:
Growing up, my family never talked about the stock market. We didn’t discuss ticker symbols over the kitchen table. Perhaps it was because my parents were too busy just trying to make ends meet. To us stocks were risky. They were the playground of the rich. You either had to have money or immense intelligence to wade into the world of stocks.
Fast forward a few decades and I realize many of my friends and colleagues were brought up the same way. To this day many of them still believe that the stock market is a fool’s bet.
But here’s the simple truth. Over time, the stock market has become one of the greatest wealth multipliers of our time. Over the past 70 years the S&P 500 has averaged a 7% yearly return on investments. Understand that in some years you would make much more more than a 7% return, in some years you could earn less than a 7% return and in other years, as in 2008, you could even lose money.
But invested over a long period of time, on average, you’ll make a nice return on your investment. Combine this with the power of compounding interest and you’ll quickly understand how stocks multiply your wealth over the long term.
That’s why the wealthy hold a large share of their wealth in stocks, while the rest of us, African-Americans in particular, hold our wealth primarily in our homes.
According to a study by the Spectrum Group, ultra high net worth investors have 68% of their net worth in investable assets while only 16% of their wealth derived from their primary residence: “Examining the portfolios of Ultra High Net Worth investors with a net worth between $5 million and $25 million, the Spectrem study shows that on average 68 percent of an investor’s net worth is comprised of investable assets, while 16 percent is invested in the principal residence. Less than 10 percent is invested in real estate, defined contribution, restricted stock, insurance, or privately held businesses.”
For many communities of color, Mr. Peters’ thoughts will resonate. We often fail to understand some of the cultural and social barriers that impede one’s ability to build wealth. But the good news is that building wealth is not overly technical and you don’t have to be a genius to do it. Peters explains that all it takes is some patience and a “get rich quick slow mentality:
Once you understand that successful investing is about getting rich slowly, you’ll set yourself up to take advantage of this amazing wealth multiplier. Your investment horizon needs to be 5,10,20, even 30 years or more. In some years you could make a lot of money and in others you could lose money. But keep your money invested over long periods of times and you’ll almost always come out ahead. This is the crucial lesson the rich have mastered.
You also don’t have to be a whiz kid to get started. According to Warren Buffett, one of the greatest stock market geniuses of our time, the most boring and no hassle methods to invest in the stock market is also be the most effective. He’s a great proponent of index funds.
Index funds allow you to simply purchase all the pieces of stock in a particular index. An S&P 500 index fund would, for instance, allow you to own a small piece of every one of the 500 largest companies in America. Index funds cut out the need to research individual stocks, providing you with a quick and easy way to start taking advantage of the power of investing.
The rich use stocks as a wealth accelerator. They understand that money invested over long periods of time is one of the surest ways to increase their wealth. Isn’t it time you do the same? Read more…
Where are you? It’s not too late to start building good wealth accumulation habits. It’s as simple as saving some money and investing it.
Originally Posted on: How the Rich Build Wealth