How to Make Money in the Stock Market

How can you get rich from the stock market? Any time I talk about investing, this is one of the most common questions I get.

Let me start with a caveat: It’s risky. Investment risk is inherent to the stock market—that’s why there are so many disclosures on what I and other investment professionals say because you can and sometimes will lose your money.

But I’m with Solomon, the wisest man who ever lived, who once said, “He who observes the wind will not sow, and he who regards the clouds will not reap” (Ecclesiastes 11.4). To put it today’s language, scared money don’t make money. To make a profit, you have to do something. Historically, the stock market has generated superior returns above nearly every investment out there—although historical returns may not always translate to personal returns.

Everyone will tell you that they have the perfect portfolio, the perfect technique, and a secret formula that is more valuable than Coca-Cola’s. But those so-called “silver bullets” haven’t made billionaire investors over time. Take it from me—there are the 3 ways to make money in the stock market:

1. Create a Portfolio That’s Diversified

This is the number one advice everyone in the financial world gives, but so few people take it.

What does it mean to diversify? You should have a little bit of bonds in there, and then a little bit of stocks with small companies, mid-sized companies, and large companies. Your mix shouldn’t be too heavy in any certain sector. Then hold on for dear life! Don’t forget to rebalance this portfolio on a regular basis.

It’s simple, but it’s so simple not to do! What do people usually do is they buy XYZ fund and ABC fund, and when XYZ fund keeps on going up, they don’t rebalance. They want to see XYZ fund go to the moon. Unfortunately, it crashes and never makes it there. That’s why it’s very important to rebalance and stick to the portfolio.

Run your portfolio like someone who invests for an entire College Endowment—someone who sticks with a philosophy in good times as well as bad.

2. Keep Your Trades and Changes Low

Play the long game. It’s been proven that the fewer human interaction and changes, the better. Major portfolios have more risk and negative consequences to return. Why is that? You can create tax consequences for selling and also incur trade fee consequences.

Also, staying out of the market on certain days to try to time the market can cost you in the long-term with return.

3. Keep on Keeping On

Saving dollar cost averaging works because over time, markets are going to go up, and they’re going to go down. But if you stay consistent and put money in the market even when it’s going down and everyone’s running for the hills, you’re going to make a really nice profit when the market goes back up.

The market is often manic-depressive and realizes that the Earth is not going to catch fire, so it course corrects. And that’s to your benefit if you’re investing in the good times and the bad.

Summary

If you have money that you know you won’t need for the next decade or so, there have been historically very few investments that can beat the stock market for 10 years. Even retirees should still have a portion of their retirement assets invested in the market. Now, how much you should have is very specific to you, but the market is a great way for you to start investing.

Check out our blog How the Stock Market Works for more!