Should the poor consider investing as a means to becoming rich?
"Definitions are in order: These definitions are important. Someone making 1,000,000 a year who spends all of it is poor. Someone who makes 500K, spends 450K a year and has three million in stocks and a paid-for million dollar home may be rich but they can't retire. They need another seven to eight million to retire. Someone with a million dollars in assets who makes 40K a year through their job, can be Financially Independent and retire.  This last example is important. In The Millionaire Next Door the authors share their discovery that the average millionaire accumulated their wealth with just a working income of around 50K (the book is a bit dated so the number should be elevated if you adjust for inflation). Finance Independent is a strange thing to wrap your head around and people with high incomes often fall victim to misunderstanding it. When figuring out how much a person needs to accumulate for their ""nest egg"", their working income is not a direct variable. Their spending and savings rate are. A doctor making 500K, who spends 450K needs to work for 51 years if they are planning to keep spending 450K/year (adjusted for inflation) forever. Someone making 60K starting at age 21 who saves 18K (30%), could retire at 49. Someone with a truly low income and poor, say 30K and under and living in a old developed nation, investing will help them a bit. Say they save 10% of their income, by the time they reach 65 (the typical age federal retirement pensions begin), they'll have enough money to live off of in perpetuity and in comfort.  They'll actually have a higher retirement income than income while they were working. But, it is challenging at those levels to save 10% of your net income. Events like your car randomly deciding to break down one day can destroy an entire year's saving." "Given that a poor person probably has much less to invest, how can odds be in their favor? To add to Lan's great answer, if one is ""poor"" because they don't have enough income to build wealth (invest), then there are only two ways to change the situation - earn more or spend less.  Neither are easy but both are usually possible.  One can take on side jobs, look for a better-paying career, etc.  Cutting spending can also be hard but is generally easier than adding income. In general, wealth building is more about what you do with your income than about how much you make.  Obviously the more you make, the easier it is, but just about anyone can build wealth if they spend less than they make. Once your NET income is high enough that you have investible income, THEN you can start building wealth.  Unfortunately many people have piles of debts to clean up before they are able to get to that point. What could a small guy with $100 do to make himself not poor anymore, right? Just having $100 is not going to make you ""rich"". There is a practical limit to how much return you can make short of high-risk activities like gambling, lottery tickets, etc. (I have actually seen this as a justification for playing the lottery, which I disagree with but is an interesting point).  If you just invest $100 at 25% per year (for illustration - traditional investments typically only make 10-12% on average), in 10 years you'll have about $931. If instead you invest $100 per month at 12% annualized, in 10 years you'll have over $23,000. Not that $23,000 makes you rich - the point is that regularly saving money is much more powerful than having money to start with." "What could a small guy with $100 do to make himself not poor? The first priority is an emergency fund. One of the largest expenses of poor people are short-term loans for emergencies. Being able to avoid those will likely be more lucrative than an S&P investment. Remember, just like a loan, if you use your emergency fund, you'll need to refill it. Be smart, and pay yourself 10% interest when you do. It's still less than you'd pay for a payday loan, and yet it means that after every emergency you're better prepared for the next event. To get an idea for how much you'd need: you probably own a car. How much would you spend, if you suddenly had to replace it? That should be money you have available. If you think ""must"" buy a new car, better have that much available. If you can live with a clunker, you're still going to need a few K.  Having said that, the next goal after the emergency fund should be savings for the infrequent large purchases. The emergency fund if for the case where your car unexpectedly gets totaled; the saving is for the regular replacement. Again, the point here is to avoid an expensive loan.  Paying down a mortgage is not that important. Mortgage loans are cheaper than  car loans, and much cheaper than payday loans. Still, it would be nice if your house is paid when you retire. But here chances are that stocks are a better investment than real estate, even if it's the real estate you live in." Yes, you can indeed become rich by investing even small amounts over time. Let's say that you begin with nothing invested, and you start investing $100 per week. Suppose you choose to put your money in an S&P 500 index mutual fund. The CAGR (Compound Annual Growth Rate) of the S&P 500 over the last 35 years has been about 11%. (That 35 years includes at least two fairly serious crashes.) You may get more or less than that number in the future, but let's guess that you'll average 9%. 35 years from now, you would be a millionaire ($1.2 Million, actually). This math works out for anyone, no matter who your parents are, where you are from, where you went to school, etc. Yes, you have a better chance of becoming wealthy the more you invest, the longer you have to stay invested, and the better choices you make in your investments.  By starting early, you will maximize your time invested, which allows you the flexibility to be more conservative in your investments and to invest smaller amounts.  But for those with a shorter time to invest, it is still doable for most people.  Get your financial life under control by eliminating your debt, setting a household budget, and investing for the future. Investments earn income relative to the principal amounts invested. If you do not have much to invest, then the only way to 'get rich' by investing is to take gambles. And those gambles are more likely to fail than succeed. The simplest way for someone without a high amount of 'capital' [funds available to invest] to build wealth, is to work more, and invest in yourself. Go to school, but only for proven career paths. Take self-study courses. Learn and expand your career opportunities.  Only once you are stable financially, have minimal debt [or, understand and respect the debt you plan to pay down slowly, which some people choose to do with school and house debt], and are able to begin contributing regularly to investment plans, can you put your financial focus on investing. Until then, any investment gains would pale in comparison to gains from building your career. A cautionary tale:  About 25 years ago I decided that I should try my hand at investing in some technology companies.   I was in the computer biz but decided that I might suffer from myopia there, so I researched some medical startups.  And I did some reasonably good research, given the available resources (the Internet was quite primitive).  I narrowed things down to 4-5 companies, studying their technology plans, then researched their business plans and their personnel. In the end I picked a drug company.  Not only did it have a promising business plan, but it had as it's CEO a hotshot from some other company, and the BOD was populated buy big names from tech companies and the like.  AND the company had like $2 of cash for every $1 of outstanding share value, following their recent IPO. So I sold a bit of stock I had in my employer and bought like $3000 worth of this company. Then, taking the advice I'd seen several places, I forgot about it for about 6 months. When I went back to look their stock value had dropped a little, and the cash reserves were down about 20%.  I wasn't too worried.  6 months later the cash was down 50%.  Worrying a little.  After I'd had the stock for about 2 years the stock price was about 10% of what I'd paid.  Hardly worth selling, so I hung on for awhile longer. The company was eventually sold to some other company and I got maybe $50 in stock in the new company. What could a small guy with $100 do to make himself not poor To answer the question directly, not much. Short of investing in something at the exact moment before it goes bananas, then reinvesting into a bigger stock and bigger etc, it's super high risk. A better way is to sacrifice some small things, less coffee, less smokes, less going out partying so that instead of having $100, you have $100 a week. This puts you into a situation where you can save enough to become a deposit on an appreciating asset (choose your own asset class, property in AU for me). Take out a loan for as much as you can for your $100 a week payment and make it interest only with an offset against it, distributions from shares can either be reinvested or put into the offset or in the case of property, rent can be put against the offset, pretty soon you end up with a scenario where you have cash offsetting a loan down to nothing but you still have access to the cash, invest into another place and revalue your asset, you can take out any equity that has grown and put that also into your offset. Keep pulling equity and using the money from the offset as deposits on other assets (it kind of works really well on property) and within 15 years you can build an empire with a passive income to retire on. The biggest thing the rich guys get that the poor guys don't is that debt is GOOD, use someone else's money to buy an appreciating asset then when you pay it back eventually, you own the growth. Use debt to buy more debt for exponential growth. Of course, you need to also invest your time to research what you are investing in, you need to know when you make the decision to buy that it will appreciate, it's no good just buying off a tip, you may as well drop your money on the horses if you want to play it like that. Fortunately, one thing we all have in common regardless of our money is time, we have time which we can invest.
This is certainly possible. There are lots of strategies that involve taking out loans to invest. However, they are all high risk strategies. There's a school district for a major US city that was able to get incredibly favorable loan terms because their repayment was assured by law. They borrowed a bunch of money and put it into a variety of sure things insured by reliable companies like Lehman Brothers. You can figure out the rest. "These people used the money they received to invest in their business enterprises. As we all know, investments of the wealthy ""trickle down"" to the poor. If that money had actually gone to poor people they would have spent it on drink and gambling. These people should be commended, not punished." "&gt; The long-run goal is to eliminate poverty through wealth creation. If that makes for some weird new social interactions, I'd say that's a reasonable cost.  Yes, I agree but there's a problem if we ""allow"" income inequality to become so rampant it causes macro-geopolitical issues. I'm not sure how that would be solved, it seems almost inherent in a captalistic model. I suppose mitigating rent seeking in favour of actual wealth creation and spreading meritocracy in proportion rather than exponentiality might be a start. The current wave of green energy, climate change and focus on health might be an indirect mitigating factor to this. Perhaps the limitation of land is the *real* issue. Space colonization would be an interesting scenario but there's likely a lot of time before that happens.  &gt; I mention comparing to earlier periods simply as a measure of progress to determine whether or not there is a problem that needs correction, such as a specific group in society experiencing real wage stagnation, or truly anemic growth rates relative to earlier periods. It's the slope of the trend line for each group that I'd be worried about, where linear or exponential is good, and logarithmic should indicate a potential crisis.  That actually makes sense.  &gt; Ultimately, I believe that it's not a persons absolute circumstances that matter, but the rate at which those circumstances are improving throughout their lives that most strongly affects their subjective well-being (but that's just my theory).  I have not read enough in both economics or human psychology to really have an opinion on this but so far, I would lean towards an agreement.  &gt; As for real estate costs, you're absolutely correct that this is a problem, but it's as easily explainable problem. Supply is artificially constrained in most of the US due to the need for explicit government permission (in the form of building permits and zoning laws) in order to build new units. Basic economics says that when supply is artificially restricted, prices will rise.  I'm on the fence on this issue because real estate is based on rent seeking and promotion of debt slavery. While I won't argue against the principle of government restriction -&gt; higher prices, what exactly keeps private interests from raising living cost as high as it can? Even in the developed world people spend as much as half of their income on rent / mortgage alone. Other than competition of course but in a high competitive area the incentive is to eat up market share. The laws of accumulation would then argue that in the end a few, large institutions would own the majority of residential homes and living apartments. They can now set their own prices and that will, in effect, be as bad as government regulation." And most wealth is squandered by the third generation. Someone has to become independently wealthy for the cycle to start over. Many will read this headline and use it as an excuse for their own lack of will to succeed. Someone had to succeed independently at some point, to earn the original wealth. "Basically, unless you are an investment professional, you should not be investing in a venture in a developing country shown to you by someone else. The only time you should be investing in a developing country is if a ""lightbulb"" goes off in your head and you say to yourself, ""With my engineering background, I can develop this machine/process/concept that will work better in this country than anywhere else in the world."" And then run it yourself. (That's what Michael Dell, a computer repairman, did for ""made to order"" computers in the United States, and ""the rest is history."") E.g. if you want to invest in ""real estate"" in a developing country, you might design a ""modular home"" out of local materials, tailored to local tastes, and selling for less than local equivalents, based on a formula that you know better than anyone else in the world. And then team up with a local who can sell it for you. Whatever you do, don't ""invest"" and revisit it in 10-15 years. It will be gone." "Following these rules will help a poor person have a better chance to climb out of poverty or avoid poverty. Not finishing high school isn't going to help them find a good job. Having children as a teenager isn't going to put a poor person into the middle class. Having children without being married and having a full time job isn't going to solve poverty, but make it worse. You call these rules ""middle class values"" as if it is a bad thing, and speak of them as an imposition. Well, breaking these rules is pretty much a ticket to generational poverty." Indeed.   And why should we incentivize careers that contribute to the good of mankind as opposed to careers that prey on mankind.   I'm with you.   If you want to help people, fuck you, be a poor.  If you don't want to be a poor, start a hedge fund and destroy the economy. "It's an interesting point that leaves me conflicted. In some sense being poor also means you are not going to get the same education, or the same value from education made available to you.  On the other hand, education seems to be universally empowering, and therefore we try to make it universally available. If the same is true of various enhancements, should we not make them also universally available? For me the ""if"" is still too big." The average inflation rate in the US over the last 17 years is 2.17% per year. source So he has $30,000 now. If another 3 years go by and he doesnt invest it in anything whatsoever, he would have 30,000/(1.0217^3) = $28,128 equivalent buying power 3 years from now.   I would not focus on how much money he is losing per year, but instead focus on the religious constraint of not gaining interest. What was the intent of the religious prophet or person who was discussing this issue? If he invested the money with a 1% interest rate, and split the profit down the middle, half of it for his savings and half of it given to a charity of his choice, would that be something that would be likely to change his behavior? Consider this approach if you're trying to help someone to understand the ramifications of a financial. Yes, because you cannot have an exponential growth rate that is faster than the rate at which the economy grows on the long term. 100% growth is much more than the few percent at which the economy grows, so your share in the World economy would approximately double every year. Today the value of all the assets in the World economy is about $200 trillion. If you start with an investment of just $1000 and this doubles every year, then you'll own all the World's assets in 37.5 years, assuming this doesn't grow. You can, of course, take into account that it does grow, this will yield a slightly larger time before you own the entire World. People just love becoming more well-off than they currently are, and one of the ways they do it is with leverage. Leverage requires credit. That desire is not exclusive to people who are not already well-off. For a well-off person who wants to become more well-off by expanding their real estate ventures, paying cash for property is a terrible way to go about it. The same goes for other types of business or market investment. Credit benefits the well-off even more greatly than it benefits the poor or the middle-class. buying real estate is for people with sufficient financial resources to cover market downturns. Please read about the 2008 real estate market. Investing in real estate when you are a poor college student is a sure way to become a bankrupt college student. A single word answer to your question: No. Not reasonable. Your best investment is completing college with as little debt as possible and the most practical experience in the market area you are interested in entering. "no way -- he suggests that if you don't have an edge, no one needs to play the game. He doesn't like the idea of a ""lesser bad"" way to invest (MPT).   If you do decide to get involved in investing, then it's about absolute performance, not relative. He believes that the whole relative performance thing -- beating some arbitrary benchmark -- is just an artificial construct." You add the wash sale loss to your cost basis for the other transaction so you would have two entries in your schedule d reporting 1.) Listing the $2000 loss as a wash 2.) The cost basis for your second transaction is thus $1000+$2000 = $3000 so when it was sold for $2000 you now have a reportable loss of $1000. For more information see here.... http://www.ehow.com/how_5313540_calculate-wash-sale.html Ok thanks for this. I am curious, how would they know its facebook that is directing these increased sales. If it's TV or radio, you can tell by increased revenues from increased spots. But for a facebook ad or a google ad, unless this is the only form of marketing, how are you sure (unless again you can ask, did you hear from us by google or fb) its from one of these websites. My thinking was for a physical product when i made this comment.