History has shown that investing in stocks is one of the most profitable long-term activities a person can engage in to increase his or her net worth. Although there are years where stocks (sometimes called "equities" because a share of stock represents ownership in a business) fell by 50%, the long-term trajectory was steadily upward. Going back in time, the Great Depression might have been scary but investors who continued to buy shares, reinvest the dividends they earned from their stock investments, and avoid credit card debt ended up doing very well.

In fact, even during the most recent recession, which was the worst since the Great Depression, the average 401(k) investor had more money in their account within 2 years than they did before the crash, even though the Dow Jones Industrial Average was still at only 10,000, down 40% from 14,000. Many new investors don't understand how this is possible but it is once you understand that capital gains are only part of the return equation.

The problem comes when investors think that the only way to become financially independent is investing in stocks. It's not. Personally, I think of stocks as one of several vehicles through which you can put your money to work like an employee. At times, stocks are highly attractive but your job is to focus on earnings the highest risk-adjusted return you can afford given your resources and temperament.

Successful Investing Is About Opportunity Cost

That means your job as an investor is to look at your opportunity cost. If you are thinking about buying shares of a business, you need to compare the potential risk and rewards to every other opportunity available to you in life.

That means your choice is not just "should I buy shares of Coca-Cola?" but instead "do shares of Coca-Cola at the current price represent a better return than I could earn by building a car wash, or buying a hotel, or starting a small business, or paying off credit card debt, or buying United States Treasury bonds, or going back to college to get a degree?".

In my own life, stocks have been an important part of my investing story. But my private businesses were much more important because they provided an engine that generated cash for me to reinvest in other opportunities. If you are a successful musician, your engine might be your song copyrights. If you are a high powered lawyer, your engine is the earnings capacity to bill clients high rates for your time. Each of you needs to identify, nurture, and grow your cash generating engines. Investing in stocks is only one part of that equation.