How to Start Investing and Build Long-Term Wealth

If you want to build wealth, investing is essential. Simply saving money isn’t enough—your money needs to work for you. If your money isn't making money, you'll always be trading your time to earn more.

Let’s talk about how to invest wisely so you can build toward financial freedom.

Why Invest?

The purpose of investing is to grow your wealth over time. A solid investment plan allows your money to compound and multiply, helping you reach your financial goals faster.

Before you start investing, it’s important to define your financial goals.

For each goal, decide:

• How much you need to save

• What type of account to use (taxable brokerage, retirement account, etc.)

• Your timeline and appropriate asset allocation

In this article, we’ll focus on investing for financial freedom—so you can eventually retire or work because you want to, not because you have to.

What Are You Actually Investing In?

At its core, investing means buying either: 

• Equity: Ownership in a business (stocks)

• Debt: Lending money to a business or government (bonds)

When you buy a stock, you’re purchasing a piece of ownership in a company. If that company grows and becomes more valuable, your investment grows too. When you buy a bond, you’re lending money. The bond issuer agrees to pay back the loan, plus interest. Companies raise capital by selling equity (stocks) or issuing debt (bonds). As investors, we can buy these through the stock and bond markets.

Stocks, Bonds, and Mutual Funds

Most investors hold a mix of stocks and bonds. Rather than buying individual stocks, most people will benefit more by investing in mutual funds, which give you instant diversification. The best mutual funds to invest in are low cost index funds from reputable companies like Vanguard, Fidelity, and Charles Schwab. While you can consider buying indvidual US government bonds (Treasuries or Savings Bonds), there are also index funds that invest in bonds.

What About Real Estate?

Yes, real estate is a form of investing too—but it’s still a business. Whether you buy a duplex or an apartment complex, you’re investing in a business that generates rental income and incurs expenses. When evaluating real estate investments, the key is cash flow—not just the aesthetics of the building.

Diversification: The Key to Reducing Risk

To lower your investment risk, you want a diversified portfolio—meaning, you invest in a wide variety of businesses.

The easiest way to do this is by investing in index funds. For example, a total stock market index fund gives you exposure to over 3,000 publicly traded U.S. companies. Some of these companies will fail, but others will thrive—and there’s no limit to how big a successful company can become.

Understanding Market Fluctuations

The stock market doesn’t go up in a straight line, in fact, it’s constantly going up and down. It has highs and lows, sometimes dramatic ones. But over decades, the long-term trend has always been up.

Market crashes are inevitable. They can last for months or even years—but historically, the market has always recovered.

Timing the Market vs. Time in the Market

No one has consistently predicted market highs and lows. Many people sell out of fear when the market drops—but that locks in losses. Remember: you don’t lose money until you sell. In fact, some of the biggest market gains happen during just a few days each year. If you’re not in the market on those days, you can miss out on significant returns. That’s why the best strategy is to stay invested and ride out the volatility.

Investing for the Long Term

Don’t invest money in the stock market that you’ll need in the near future. Generally, you want to invest in the stock market with a 10+ year horizon. Even as you approach retirement, your portfolio should continue growing. If you retire at 65, you might need your money to last another 30 years!

What’s a Good Asset Allocation?

There’s no one-size-fits-all answer, but here are a few common approaches:

• JL Collins' Approach (from The Simple Path to Wealth): 100% in VTSAX, a total stock market index fund.

• More Diversified Approach: A mix of U.S. stocks, international stocks, and bonds.

• Morningstar Lifetime Allocation Index (for 20–30 year horizons):

o   53–57% U.S. stocks

o   26–36% foreign stocks

o   7–13% bonds

o   4–5% commodities

As you get closer to retirement, you'll gradually shift more toward bonds and cash to preserve capital.

How to Choose the Right Funds

Mutual Funds vs. Index Funds

A mutual fund is a collection of stocks or bonds. Some are actively managed, meaning a team of fund managers picks the investments.

These active funds come with higher fees—including:

• Management fees

• Trading costs

• Possible sales commissions (loads)

• Marketing fees (12b-1 fees

On the other hand, index funds aim to match the performance of a market index (like the S&P 500) and are passively managed, meaning lower costs.

The Power of Low-Cost Index Funds

Index funds were pioneered by Jack Bogle, founder of Vanguard. His idea was simple: if it’s hard to beat the market, why not own the entire market at a low cost? And he was right. Over time, low-cost index funds have outperformed 90% of actively managed funds over 10 years.

Today, you can find excellent index funds from providers like:

• Vanguard

• Fidelity 

• Charles Schwab

• Ishares

Why Fees Matter

Even small fees can significantly erode your returns over time due to compounding.

Let’s compare two scenarios:

• Low-fee index fund: 0.2% expense ratio, 8% return

o   Invest $23,500/year for 30 years = $2.57 million

• High-fee scenario: 1% advisor fee + 1.2% mutual fund fees, 8% return

o   Same investment = $1.79 million

That’s nearly $800,000 lost to fees—nearly one-third of your potential wealth!

The Power of Starting Early

Time is your biggest ally in building wealth. Here’s a powerful example:

• Abby invests $5,000/year from age 25 to 35 (10 years, $50,000 total):

o   Ends with $602,070 at age 65

• Bob starts later, investing $5,000/year from 35 to 65 ($150,000 total):

o   Ends with $540,741

• Cindy invests $5,000/year from 25 to 65 (30 years, $200,000 total):

o   Ends with $1,142,811

The earlier you start, the more time compound growth has to work its magic.

The more you invest, the more your wealth will grow.

Final Thoughts

At its core, investing is about buying equity in businesses or lending money through bonds. The easiest and most effective way to build a diversified portfolio is through low-cost index funds.

Stick to your long-term plan, avoid high fees, stay invested through ups and downs—and your future self will thank you.