For the average person, the stock market might seem too complex or out of reach. The average person might only make $35,000 a year so investing in them just does not make any sense. However this is far from the truth. In this article I am going to show you how even an average person can profit in the stock market. All it takes is a little time, effort, and patience.
Average people make millions in the stock market by slowly overtime taking power of an effect called “compounding returns.” This compounding return effect is what allows an average person to take a portfolio of only a couple hundred dollars and explode it to well over $1,000,000.
Within this article I am going to outline how an average person can start taking advantage of compounding returns, what investments an average person should buy first, and how long it would take for an average person to see a profit of $500,000 from the stock market.
Here at Chronohistoria I teach people how to generate above average market returns in investing. I routinely publish articles that go over investment research, methodologies, and tips/tricks of the trade so that you can be better prepared.
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How An Average Person Can Take Advantage Of Compounding Returns to Profit
Compounding returns is the real secret here. I want you to stop thinking in terms of investments but rather in timelines. If you can make 10% in the stock market per year that will slowly over time snowball out of control.
The reason for this is because each year you make 10% off the previous year. For example, a $100,000 portfolio will make $10,000 its first year. In the second year that same portfolio will return $11,000 at the same return! Next year you will make $12,100! The best part is that this is hands off.
Now if you let that $100,000 portfolio continue to grow after 30 years you would have a value of around $720,000-$800,000. Assuming that you can get an average dividend payment of 5-7% then you would be making around $50,000 a year passively for the rest of your life.
All that from compounding returns. That is why it’s called a snowball. It snowballs out of control over time for the average person’s benefit.
However it’s easy to just talk about how an average person can take advantage of this. Now let’s put theory to the test and talk about what assets you need to buy to take advantage of this.
What Investments Should An Average Person Buy To Profit
This really depends on the person. In order to take advantage of compounding returns we need to find a variety of possible investments in the stock market that we can take advantage of.
For this purpose I will talk about 3 types of investments that the average person should look at to profit in the stock market. First, is Bonds. Second, is ETFs. Third, is individual stocks.
Each of these 3 groups of possible “investments” have different levels of risk. As such they are designed for different types of average investors/people in the stock market. One average person might only want to buy bonds, while another might want to only buy solid stocks.
Let’s jump right into the 3 possible investments an average person should buy to profit.
A bond is a loan given by a company, entity, or country to an investor. The bond guarantees that so long as the issuer remains they will pay back the loan to the investor with interest. (source)
Bonds are great for average people who want to conservatively profit from the stock market. This is because instead of you investing in the profitability of a company, entity, or country you are instead investing in the longevity of it.
For example, you can buy government bonds. In this case so long as the government does not dissipate then you will continue to get your money. For this reason bonds are seen as very conservative investments.
Further, you can buy bonds of individual companies. These bonds carry more risk but offer a higher payment on the bond. However since you are buying bonds of individual companies you are at a higher risk of the company going bankrupt.
The typical yield on bonds ranges from 2-6% per year. You are not going to see much profit from bonds but you can rest easy knowing that your money will be safe.
The real problem however is that bonds typically don’t offer compounding interest. This is because the returns on a majority of bonds are fixed to the principle. For the averager person you will need to buy a bond mutual fund and elect to have your proceeds reinvested back into the fund.
Should an average person buy bonds to profit from the stock market? The answer depends on your current net worth and your financial goals. Do you have 1 million saved up and only want to generate $30,000 to live off without worrying about your million? Then yes, you’re the average person who would benefit from bonds.
Electronically Traded Funds are what I recommend 95% of average people buy to profit from the stock market. The reason for this is because of the nature of ETFs and their returns.
ETFs are simply just a basket of individual assets that are grouped together to follow an index. This index can be anything from top 500 companies in the U.S to top 2,000 renewable energy companies globally.
What this does is diversify your portfolio across an entire sector. You will capture a majority of the sector’s movement while minimizing your total potential risk. This is because each 1 share of the ETF that you buy actually is buying several smaller shares of individual stocks.
As we can see from the above image an ETF portfolio allows the average investor to capture 75% of the total possible return in a sector. The stock based portfolio on the other hand will give you higher return but significantly higher risk (20% in an ETF portfolio vs. 50% in stock portfolio).
For the average person this means that you can simply invest and forget your way to profit. The ‘average’ returns for ETF portfolios range from 5-60% per year depending on the year. For example the ARKK fund in 2020 returned 152%. (source)
Naturally however since an ETF is an amalgam of individual stocks you can’t predict the returns of the ETF. However what you can do is capture the movement in the entire sector. This allows the average person to simply sit back and compound their portfolio until they are millionaires.
For the average person you should be building portfolios around ETFs. It will lower your total risk while capturing a majority of the profit in the sector. Here are a couple of the most commonly bought ETFs among average people.
- SPY: U.S Stock market (return at 10.34%)
- VTI: U.S Stock Market (return at 8.69%)
- ARKK: Innovation Fund (return at 28%)
- VT: Total world stock fund (return at 7.83%)
I wrote up an entire article on the best ETFs for average people. (click here if you want to read it)
Third: Individual Stocks
Ok, if you know what you’re doing this is where you should be. Average people who are aware of how to value companies and invest can see profit well above 25% per year. That level of compounding overtime will make you a millionaire much faster than normal.
That is where I come in. I teach average people how to invest at the professional level. With time you can easily graduate to the ‘professional’ investor level. (there is no such thing, we all are always learning).
Let’s go over how an average person can start to pick out individual stocks successfully and in a repeatable manner. The goal here is to beat the average return on ETFs. If you can’t do that then you’re better off investing in ETFs.
Investing in individual stocks involves three steps. First, you read the fundamentals of the company. Second, you analyze the technicals. Third, you develop an investment theory/hypothesis.
This takes a lot of time to perform properly. It’s much like riding a bike. Once you learn how to properly evaluate a 10-k, build a DCF, look at technical statistics, and develop an investment theory then you will easily start to eclipse the average return on ETFs. It’s not uncommon to see professional investors retire after a couple years after they know what they are doing.
If you’re interested in how to pick individual stocks properly then I suggest you check out this article I wrote up that goes over the full process in depth. (click here)
How Long It Would Take For An Average Person To See A Profit of $500,000 From the Stock Market
How long does an average person have to wait to see decent profit from the stock market? Well that depends on two variables. First, how much money does the average person have to invest? Second, how long until that person has a sizable nest egg.
I am going to give some assumptions. Let’s say the average person can only invest $10,000 right now and that they want to have $500,000 in a stock portfolio.
Next, I am going to build 3 theoretical portfolios based around the average returns of the 3 investment classes (bonds, ETFs, and stocks). I am going to assume that the average person knows how to invest successfully for each investment type.
Here is the possible timeline until the average person can expect to see a profit of $500,000.
Given that you let your $10,000 grow over 25 years then here are the results. Both Bonds and ETFs fail to give you that $500,000 magic number while a stock portfolio sees almost double that return.
As we can see the average person can make a massive amount of profit in the stock market with the power of compounding interest. The trick however is to learn how to evaluate and predict the right investments for your portfolio.
The trick is to understand the power of compounding returns. Then all you need to do is pick the right stocks/ETFs. This is what allows an average person to profit from the stock market. You need to think on a longer timeline to start investing successfully.
For those of you who want to learn how to invest in good stocks then I suggest you subscribe to the newsletter or reach out to me on social media. I am always available to talk shop and I love the markets.
Here at Chronohistoria I teach people how to generate above normal market returns (alpha) in the stock market. I routinely publish articles that go over investment research, methodologies, and tips/tricks in the trade. The goal is to better arm the average person to generate wealth in today’s crazy market.
Further, you can check out some of the other articles below.
Do you still own a stock after its delisted? How do you sell it? Don’t worry the stock is still worth money and here is how to sell.
Making 1% a day in the stock market is hard but defiantly doable. Here are 3 simple steps to helping you achieve this return.
Short selling comes with many risks; one of which is that you will have to pay dividends on short positions. This can eat into your profit.
Until next time, I wish you the best of luck in your investment journey.