Get-rich-quick schemes can absolutely work. They're the crazy stories you hear about on the news where someone poured all their life's savings into a penny stock or a shiny new crypto and woke up one morning to find out they were millionaires. It happens -- but the odds of it happening to you are probably about the same as the odds of you winning the lottery.
Rather than trying to race your way into the ranks of the rich, why not take your time and try a slower but surer path to the wealth you want?
Image source: Getty Images.
The problem with get-rich-quick schemes
Get-rich-quick schemes are usually built around the idea that you have to take a big risk to earn a big reward. But the problem with big risks is that they don't pan out for most people. There simply have to be some losers in order for others to win, and there isn't an easy way to ensure you're one of the lucky few.
Let's look at an investing example. Let's say you spent $50,000 to buy 5,555 shares of AMC (AMC) on May 5 at $9 per share. Then, you decided to sell on June 1 when share prices hit $62.55, and pocketed your nearly $300,000 in profits. That would be considered a successful get-rich-quick scheme.
But if you'd thought AMC stock was going to go even higher than $62.55 per share and you'd decided to hold onto it for a few days longer, you would've lost over $30,000 by June 3 when share prices dipped again. Of course, there's no way to know you're on the verge of a loss until it happens. So it's largely luck that separates the winners from the losers.
Let's consider another example -- that of the meme crypto Dogecoin. It saw a meteoric rise in early April, but since then, it's experienced more ups and downs than a rollercoaster, as shown in the chart below.
Dogecoin Price data by YCharts.
This kind of volatility might make a few millionaires, but those who don't time things just right are going to lose their money when the social media hype dies down and Dogecoin's share price falls to reflect its (little) actual value.
Getting rich slowly will help you stay rich
Rather than trying to time the market, focus on investing in established companies with solid business models that you believe will be around for decades to come. Share prices on these stocks are typically higher than what you see with the targets of get-rich-quick schemes, and they don't usually see huge changes in their share prices overnight. But they have more staying power.
There's serious debate as to what, if any, kind of value cryptocurrency is going to have in 10 years. But no one is debating whether a tech giant like Google or Apple is going to be around in 10 years. They're strong companies that continue to innovate, and their share prices have slowly but steadily risen over the years to reflect their strong performance. Investing in companies like these is a much safer way to grow your wealth.
One of the best ways for beginners to get their piece of huge corporations is to invest in an index fund. These are bundles of stocks you purchase together, and they're designed to track -- and return a similar return to -- a market index, like the S&P 500. When you purchase one of these, you instantly get part-ownership in hundreds of companies, often in many industries. This helps ensure that no single company's performance has too large an effect on your savings. And, yes, you can still make a ton of money investing in an index fund. It'll just take a little longer.
The S&P 500 has had a compound average annual growth rate of 10.7% over the last 30 years. It had its ups and downs during that time, but if you'd invested $50,000 in an S&P 500 index fund in the beginning of 1991, you'd have had over $1 million by the end of 2020.
Index funds are also pretty affordable. You don't need tens of thousands of dollars to invest in one, and expense ratios -- an index fund's annual fees -- are usually well under 1%. Some of the most popular S&P 500 index funds have expense ratios as low as 0.03%. That means you only pay $3 per year for every $10,000 you have invested in the fund.
There's still a risk of loss with index funds, as there is with any investment. But that risk is much less than the risk associated with most get-rich-quick schemes. You don't need to choose precisely the right stock and the right time to buy and sell in order to make a lot of money. All you need to do is buy and hold.
It's a strategy that requires patience, but I'm guessing you want to become rich so you can stay wealthy and enjoy the money you've accumulated. You'll have a much easier time doing that if you don't have to worry about the meme stock you've invested all your savings in wiping you out. If you'd like to invest a little money in a stock you think is undervalued, that's okay. But make sure you have a solid, diverse foundation to work from first.
