The other day a guy asked me a question I had not thought about: Why make money in the stock market?
Not why as in ‘why should you’ or ‘why not real estate’ but ‘why do it at all’?
And that kind of stopped me. I’ve just taken it for granted for so long that people want to make extra money. And here is the guy asking me, basically, what’s the point?
I’ll admit, he is kind of a nihilist.
But his question stands.
I mean we dedicated a huge article to our principles on investing, and I never answered the existential why.
So here it is, my thoughts on why we should be making at least some of our money in the stock market.
Why Financial Freedom is Important
Financial freedom means having the ability to make choices about how you spend your time and money without being constrained by financial limitations.
And that includes your job and the demands of your boss.
When you make your money from a job, you sell yourself to your employer. You sell your freedom.
But when you invest in the stock market, you have the potential to earn a steady stream of passive income that can give you the freedom to live the life you want.
You effectively reverse the equation. Other people work for you.
Plus, with the power of compound interest, your investments can continue to grow over time, providing even more financial freedom down the road.
Further Reading: The Build Your Own Berkshire Strategy
How the Stock Market Can Uniquely Help You Achieve Financial Freedom
So why not real estate or gold or some other investment?
First: Passivity.
Trust me, being a landlord is work. It can suck. Enormously.
But when you own a portion of the S&P 500, you own a portion of the 500 biggest companies in the US. You are entitled to a portion of their earnings.
And it takes no more work than hitting the buy button.
It is literally the most passive source of income I have seen (and I have seen them all)
So why not gold?
Gold doesn’t produce anything. You can’t claim a portion of its earnings. To make money from it, you need to find someone who will pay you more for it than you did.
That’s called The Theory of Greater Fools.
Only by owning a wide range of profitable companies can you reliably claim your share of their earnings.
Meanwhile, earnings of US corporations grow by around 5% per year after inflations. That gives you enormous compounding power.
The Advantages of Investing in the Stock Market for Financial Freedom
Whether you’re counting total earnings (like we do in our BYOB investing strategy) or you just count dividends, the market has the potential for a steady income.
I know people fret over the ups and downs of the market, but you are far more likely to have a renter bail or property lose value in an unexpected way than you are to suffer permanent losses in the market.
With the right math and mindset, you can prepare for, predict and manage the ups and downs of the market. We go into this in depth over on our investing page.
And here’s a bonus: When you count total earnings (as opposed to just counting dividends), roughly 2/3s of your earnings are tax-deferred. Maybe even tax-free.
How?
I only have to pay tax when I sell my shares. I can control the rate I sell to keep my income in the low-to-zero income tax bracket if I want. And, if I leave my shares to my daughter, the basis will step up at my death, and neither she nor I will have to pay tax on all the money I made while I was alive.
The Benefits of Having Control Over Your Financial Future
Having this level of control and peace of mind is indescribable.
It’s good for the heart, soul, and body.
And I mean that literally. Financial security is worth far more than it costs. When unexpected things happen, you simply don’t worry. You can handle it.
When covid hit, my wife and I got serious pay cuts, our fridge and furnace broke, and my wife was in a car accident that totaled the car. (This all happened within a month, by the way).
And it all sucked. Especially the car accident.
But we were secure. Even with the severely reduced pay, our investments stepped up and we had enough money to replace everything that we lost and continue without disrupting our standard of living.
Maybe the real reason we make money in the stock market is this security and the reduced stress that goes with it.
I mean, how many years has this reduced stress level added to my life?
They say can’t buy time, but I’d argue that you can. As long as your money is used to reduce stress and increase time with the people you love.
Why the Stock Market is the Best Way to Secure Your Financial Freedom
Short answer: passive compounding.
Long answer:
- Truly passive income. Everyone seems to want to sell you on passive income, but the only actually passive method I’ve seen is right here
- High returns: because of compounding, the potential for high returns over a long time period is absurd. You can absolutely generate enough income to live on without decreasing your investment (for a case study check our investing page). That means your kids can inherit and have all the same benefits you did.
- Diversification: We’re investing in 500 large companies at a time, many of which compete with each other. That means when one weakens, it’s because another is gaining strength. And when a company shrinks too much, it falls right off the index. So the whole thing is self-cleaning.
Conclusion
So why make money in the stock market?
Freedom. Security. Peace of mind.
Even my nihilistic friend from the intro can get behind that. It’s not really about gaining wealth or getting rich.
It’s about better spending the time you have.
