Why Investing is the Best Way to Get Rich | Phil Town

hi guys I'm Phil town from Roland investing and today I want to talk to you about why investing is the best way to build wealth [Music] it's been said that you can't save your way to wealth and historically low interest rates of the last decade they definitely bear this truism out those who kept money parked in a CD or money market account between 2010 and 2007 teen may find that these funds have far less purchasing power today that when they were first deposited number one and second they're hardly any bigger than you started with all due to the growth killing combination of low returns and moderate inflation first you guys compounding is incredibly powerful Albert Einstein famously has said that the power of compounding mathematically is one of the things he never really figured out it's just not very intuitive that you can start with a little bit of money here and as you go forward in time the value of that amount of capital starts to just go insanely up like some sort of a hockey stick so much of the growth of the assets that you're investing in in your initial investments comes from the compounding power of stocks stock market is a compounding machine and what that means is when you're investing in a company like Apple Computer that doesn't even really produce much in the way of dividends I guess they've started to but for many years they didn't produce a dividend which is of course them handing the investors back some of their money Apple kept the money in and grew money on the money that they kept so let's say they had a thousand dollars of equity and Apple and they were growing that money are you sitting down at thirty percent a year which is the return on investment equity that these guys have at Apple so thirty percent a year that means after a year you've got one thousand three hundred dollars of equity sitting in an apple but they're growing that equity at thirty percent a year right so the next year they're doing thirty percent on the original thousand dollars which is another three hundred and thirty percent on the new three hundred from the year before which is another ninety so you can start to see that 30 percent applied to the growth of all the money inside Apple creates this incredible compounding power it's a stunning thing what happens when you double money over and over again it just gets so huge you can't believe it $1,000 doubled just 20 times $1,000 doubled 20 times it's a billion dollars $1,000 doubled just ten times is a million think about that for a second Apple is growing money compounding at 30% a year if they were compounding at 30% a year they're doubling the money every two and a half years so in five years they doubled twice in ten years they've doubled for x so the thousand dollars became 2 then 4 then 8 then 16 so you're gonna see this enormous rise based on compounding the money that's sitting in Apple and after a while these assets start to reach a kind of critical mass Apple right now man an investment in Apple back in the year 2000 he's worth millions just a thousand dollars is worth millions and millions of dollars from the compounding power of that stock so you're gonna be able to take advantage of this with rule 1 investing by learning to invest in companies that generate a great deal of compounding power so what this means is you need to get an early start on investing you've got to get going because the longer you put off building your wealth the more you're gonna have to put away later to hit your goals and that gets harder and harder to do even if you can only afford to invest a small percentage of your paycheck having the power of time and compounding giving it to a company like Apple to grow when you've got that on your side man you can actually do amazing things over a 30 year investing life so while a 25 year old will need to set aside $500 a month to reach a million bucks at retirement that assumes a very modest 6% return somebody who doesn't begin saving until 40 you gotta save $1,000 a month to reach the same goal all right believe me if you can get your rate and return up around 20 to 30 percent like Buffett I'm telling you you don't need a lot of money to start with you just need to start just get a hundred dollars in there so starting the compound interest process early it's also going to give you the flexibility to reduce your investment contributions when you run into financial stress right if you get that early money in there it's growing you don't have to worry so much about five hundred dollars a month later on the earlier you begin the sooner each month contribution begins to make up an increasingly compounded percentage of the total invested assets the key is to get in early so in the investment context mostly risk and return are correlated right you know particularly when it comes to low-risk investments you're going to get a financial product with a guaranteed rate of return like a CD or a money market account a bond from the federal government you don't have much risk at all of having any loss of your capital but you're also not going to get a rate of return that even maybe beats inflation now you go the other way any invest in individual stocks you're going to have significant price fluctuations in the short term but also if you're buying companies that are wonderful and you're buying them on sale you're going to have the best opportunity for massively beating inflation in the long term and creating a great retirement so many people who avoid the stock market are afraid you know they're worried about losing their hard-earned money with a bad stock pick you know they look at companies maybe like Enron or world come as now big examples of the dangers of stock market investing and look at nobody's going to get it right all the time but these kinds of unfortunate situations just it you know they kind of illustrate the risk of investing in a company that you don't understand or something you haven't fully researched or aren't at all representative of the kinds of investing that we do really good investing is all about the certainty that down the road ten years that company's going to be worth more than it is today the true investment risk comes from not knowing a business's value and educating yourself on the business's fundamentals can all but eliminate both the perceived and the actual risk warren buffett is said that diversification is just protection against ignorance and he lives out this advice by holding about 70% of his investment dollars in just a few companies that he knows and he trusts if you compare the price of a loaf of bread a gallon of gas a pair of new shoes 36 years ago to today you're gonna quickly see that merely doubling your investments over the next three decades is it going to be enough to maintain your purchasing power you're gonna need more help in fact you're gonna need to identify investments that can maintain a steadily high rate of return and ensure that the money you set aside is compounding as hard as possible historically the stock market individual companies have been the only investment option that offered double-digit rates of return over the past 90 years the S&P 500 index has returned an average annual gain of about 7% and investing in individual companies can significantly increase this rate of return over that same period of time Warren Buffett has averaged about 21% at 7% you double your money every 10 years at 21% you double your money every three and a quarter years unbelievable the difference that makes in your life rule number one investing assumes a target of 15% right staying invested for the long term taking the emotion out of the equation by doing your research first being patient waiting for the opportunity to buy great companies when they go on sale allows you to ride out year-to-year fluctuations and not worry about what the markets doing and over time you are going to get rich Warren has said once that all you have to do is focus on finding 20 companies over your lifetime and if only four or five of those are really successful investments you can't help but becoming wealthy I love that I want that for all of you guys but first you gotta have to learn how to do learn rule 1 investing we'd love to hear from you are you building your wealth for the future leave a comment below with your answer and I'll be sure to follow up with you and thanks for watching you guys now go play if you enjoyed this video and you feel it was valuable and teaching you more about how to build wealth by investing hit the like button and please share this video with your friends and if you want more investing content subscribe to my channel and don't forget to click the button on the screen for a free gift thanks again for watching

Channel: Phil Town's Rule #1 Investing

Views: 206,543

Rating: 4.9014149 out of 5

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Id: bOVamLc5Etc

Length: 9min 7sec (547 seconds)

Published: Thu Jul 05 2018