Using the S&P 500 as a frame of reference, the stock market delivers around 10% returns per year on average. This is much better than you can get from any banks or investment funds, so it’s not unusual to find people thinking that making money from the stock market is easy. Is this true? Is stock market easy money?
The stock market can be easy or difficult to make money in, depending on your understanding of the markets and how you manage your portfolio. It’s easy money for experienced traders and investors who understand the nuances of market movement, while inexperienced hands can end up losing money.
In this article, will take a closer look at why the stock market could be easy money for some but not for others.
Is the Stock Market Easy Money?
The stock market is easy money when you’re buying stocks from low-risk countries with stable economic policies. Such economies have twists and turns like any others but ultimately trend upwards over long periods. For example, the S&P 500 is one of the best measures of the US stock market. The US economy is one of the strongest worldwide, with robust and sustainable policies that ultimately lead to positive years for the stock market.
Over the last 30 years, the S&P 500 has delivered an average of 12% per year. This may not sound like a lot, but it’s more than you’ll get from your savings account. Now, assuming the average returns continue indefinitely, and you put $100 into your investment every month for 45 years, you’ll have around $1M waiting for you at the end, thanks to the power of compounding. That’s easy, stress-free money.
Similarly, you can also earn excellent returns if you know how to pick out strong stocks before they become popular. Had you invested $10,000 in Amazon stock in 2008, your investment will be worth more than $200,000 today. Other stocks with ROI in the thousands over the last few years include Netflix, Walt Disney, NVIDIA, Shopify, and so on.
Another method of making easy money from the stock market is to become a day trader speculating on the micro-market movements of individual stocks. In this approach, you don’t actually hold the stock. Instead, you’re betting on the micro-movements. There’s a high potential for success here, but it requires a lot of expertise.
Of course, there are plenty of high-risk undiversified investments that can provide the returns in all our calculations above in a shorter time, but many of those can also bankrupt you very quickly.
So, the stock market is easy money if you buy and hold a strong, diversified stock portfolio like the S&P 500, unearth stock gems before they become too costly, or become a skilled day trader chasing micro-market movements from day-to-day.
Why Is the Stock Market Not Easy Money?
As we’ve seen above, you can only make money from the stock market sustainably in three major ways:
- Become a skilled day trader.
- Buy and hold a diversified portfolio like the S&P 500.
- Find stocks with huge ROI potential before they become popular.
None of these three methods will come easy to any average investor. Becoming a skilled day-trader can take years to accomplish, if ever. It’s a rewarding career path, but only very few people have succeeded with it. Depending on where you look, around 80-99% of day traders will close a trading year in the red. Is it easy money when only 1% of entrants can make it?
Similarly, finding high-potential stocks early enough is like looking for a needle in a haystack. It takes hours of research to find a reasonable option, and even when you’ve found one of these, you’ll need to keep an eye on the business fundamentals to ensure your prediction is on track.
Again, not many people can take out the time to engage in the research required for this to work. Even if you have the time, you need to know how to analyze fundamental research and develop actionable deductions. Some people pay stock pickers, but this is hit or miss. For every decent option, there are a dozen automated picks that are basically glorified guesses.
This leaves us with a buy-and-hold approach as the only way an everyday investor can make easy money from the stock markets, but again, is it easy? You may be wondering how hard it can be to hold a portfolio, but you’ll be surprised.
Here are a few reasons why people don’t make money with buy and hold portfolios:
Waiting Until the Market Is Safe To Invest
When the economy falters and the S&P 500 goes into a drawdown, some people pause their investments, while others withdraw their existing funds—often at a loss.
Waiting for stocks to stop their decline before getting back in is often not a good idea because there’s no guarantee that your definition of “safe” will not coincide with the next bear run. This fear of bear markets ultimately makes you lose averse and denies you the opportunity to recover losses or at least buy into the drawdown.
Waiting for Prices To Drop
This concerns investors that are not yet in the market. Of course, prices will drop from time to time, but how low is okay for you? As you wait for prices to drop, you may miss out on rallies of more than 50% over a period. Trying to cherry-pick days or weeks of the year for investment is rarely a good idea.
If you bought the S&P 500 with $10,000 in January 1999 and held it till the end of 2018, you’d have tripled your investment by December 2018. If you were waiting for prices to drop (or rise as discussed above) and ended up missing the best ten trading days of that period, you’d have lost 50% of your potential return.
Many people can’t buy and hold the S&P 500 because they want some excitement as they’d get from a casino or in high-risk investment vehicles that have lots of boom and bust cycles.
Unfortunately, they fail to understand the fact that smart investing has to be boring. The best investors will patiently wait for years to reap the benefits of compounding instead of getting bored and liquidating their investments to chase the next big thing.
How Can You Make Easy Money From the Stock Market?
With the points above, you can see how the stock market can be easy money for some, but not the others. To ensure you make easy money in the market, here are some tips to keep in mind:
- Invest in line with your strengths. If you’re a short-term investor looking for quick gains, you should consider becoming a day trader (if you have the skills or have the time to learn). If you want a passive means of making money from the markets and have the patience, go for a buy and hold approach, targeting compounding returns.
- Define your goals. Why are you investing? By understanding the reasons for your investment, you can make better decisions overall. For example, if you’re investing towards retirement a few decades down the line, you won’t concern yourself with short-term fluctuations in the stock market.
- Get external help. Speak to your financial adviser and discuss the best way to make money from the stock markets, considering your personal circumstances.
Is the stock market easy money? Yes and no. It’s easy money for people with clearly identified investment goals with adopted investment approaches they have the best knowledge.
For those without a clear picture of their investment dreams or the technical know-how to actualize them, the stock market can be an unforgiving environment.