When it comes to living off the stock market, the internet is full of people, often snake-oil salesmen, who claim to have the perfect method for generating income from your stock market investments every single day while you travel the world, spending just a few hours a week on it. Of course, that’s not how it works.
Here we explain the only effective, empirically proven way to live off the stock market. It’s a message not everyone will like, but it’s the truth all the same. In fact, the odds that you’ll end up living off the stock market are extremely low, mostly because, as we said, you’ll need a main activity that generates income so you can keep putting capital into the markets.
Living off the stock market through trading?
Most of these geniuses, or snake-oil salesmen, make truly dangerous claims that end up costing money to people who naively think they can get hold of a strategy or method that will let them beat the market month after month, when the data show that more than 90% of traders lose money, while the rest achieve returns below those of passive investing.
Living off the stock market through trading means you’d need a monthly return higher than the annual return of the best investors of all time.
There is only one way to live off the stock market: earning passive income from share dividends that is enough to sustain your lifestyle. Anything else isn’t living off the stock market. It’s more like gambling on it. And the stock market, just like the best casinos, works like this: if you go in to play and stay long enough, the house ends up winning.
See also: Serious stock market investing mistakes, part two
This message may not be the most popular one, but at the end of the day it’s reality. Ignore it and you’ll probably end up in trouble.
We already covered this in a previous article on randomness in investing, using two real investors as examples. It’s a story from Nassim Nicholas Taleb’s book Fooled by Randomness, and it basically describes the reality of the markets. Whoever earns much more in the stock market does so because they take much more risk. If you keep taking that high risk over time, time itself will make you blow up (a term used in market jargon for a trader who has gone past the accepted loss limits and will have to look for another job).
Actively managed funds vs index funds
We’ll only touch on this point briefly here. On average, over a 10-year period, actively managed investment funds fail to beat the return of an index fund. Passive investing has long been shown to be more profitable than active investing.
*Index funds are the way to buy an entire index.
So why do people, and even active fund managers, keep trusting in these skills to beat the markets? Although we know an index fund can give us an average annual return of 8 to 12 percent over 10 years, everyone sees how some companies shoot up by as much as 300% in a single year.
Everyone thinks it would be wonderful if the manager of our investment fund went short when stocks are about to fall, got out of investments that are going wrong and got into the stocks that are rising at that moment.
Let’s just say everyone wants to believe they’ll be able to squeeze out more return than an index fund by managing actively. But reality shows that very few manage it, if they can sustain a winning streak for long at all.
The reality is that the more active you are, the more likely you are to move your pieces in the wrong direction. And that’s generally what happens. On top of that, actively managed funds charge high fees, whether the fund makes money or loses it.
We’ve already explained how index funds work and how they differ from ETFs in full detail.
But getting back to the point: if you want to live off investing in the stock market, forget about trading and miracle techniques. They don’t work, whatever anyone tells you.
Featured image: Miscellaneous Items in High Demand, PPOC, Library of Congress, Public domain, via Wikimedia Commons.
