Are you looking to turn your hard-earned salary into nice savings for later in life? If you’re reading this, then you probably are. And if you’re reading this, you probably also know that the stock market is the best way to overcome the impact of inflation. Savings accounts, CDs, and even corporate bonds just aren’t up to the task.
The thing is, getting a good profit from stocks doesn’t take a lot of time, effort, or maintenance. Arguably, it’s best to be a truly passive investor and just leave things alone for years. Here’s an easy recipe to multiply your investments by a factor of 10, and it doesn’t even require starting with a lot of cash.
1. Shop the wide market every year
There are several ways to skin a proverbial cat, but the easiest way is also possibly the best. That is buying on a broad market index like the S&P 500 with an instrument like Trust SPDR S&P 500 ETF (NYSE: SPY). This index fund gives you balanced exposure to 500 of the world’s largest company stocks, allowing you to participate in their long-term growth, which averages 10% per year. Some years are better and some are worse. However, over time, you can expect an average gain of around 10% per year.
People are also reading…
the key is to do regular investments, even when doing so feels uncomfortable, and even if doing so means you have to cut back on some of your discretionary spending. As you’ll see in a moment, a seemingly modest investment made consistently can turn into a surprisingly large sum of money later on. Similarly, not making this contribution year after year can dramatically affect your eventual savings.
Still too complicated? Keep in mind that most brokerage firms can automate the process of regularly moving money from a checking or savings account to your investment account and also automate the actual annual (or monthly) investment in a fund.
2. Reinvest dividends and any capital gains
When you’re buying a stock or fund, you’ll generally have the option at the time the trade is made to reinvest any dividends the position pays into more of the same stock or fund. Choose “yes” when given the option, and if your position is already set, contact your broker, or log in to your brokerage account, and change to this setting.
Sure, it’s tempting to just accept cash dividend payments. You’ll have access to this spendable money as it comes in, even if your ultimate goal is to use these payments to buy more stocks or other mutual funds. The thing is, too many investors never really get to do that, missing out on an important growth opportunity by sitting idly by with their cash or cash-like holdings.
Here’s an example that might motivate you to make this unique move: While the S&P 500’s average annual return was an impressive 11.4% over the past 10 years, that figure rises to 13.5% if you had reinvested all dividends. that he collected during this period. That’s a big difference over time.
3. Leave him alone as long as possible
Last but not least (and this is the hardest), do step #1 for decades, making sure that step #2 applies to both any old and new money that is invested in savings for The retirement.
If you’ve set up your automated investment and brokerage accounts correctly, the only thing you’ll need to do to successfully complete step #3 is, well, nothing. Assuming a 10% annual return for the S&P 500, a typical career stretch should put the value of your portfolio somewhere on the order of 10 times your total contributions during that time frame.
Surprised? don’t be The following chart illustrates how an annual investment of $5,000 made for 36 consecutive years ($180,000 of your own contributions) will be worth about $1.8 million at the end of that time period.
It’s called composition. In this case, what notably adds up is your past earnings, whether they come from dividends or capital appreciation. That is, most of the growth here comes from your earnings, not your annual contributions, so new earnings are based on previous earnings. For perspective, during the last year of this hypothetical 36-year stretch, the average market gain of 10% would translate to net growth of more than $163,000, dwarfing last year’s new cash contribution of $5,000.
Of course, the sooner you start earning something, the more that growth will help you in the future.
Less is more
The formula is not complicated. In fact, investors who strive to keep things simple often tend to do better; Pursuing market-beating returns by frequently trading individual stocks (ironically) often leads to outperforming the market. Index funds solve that problem quite well.
It also wouldn’t hurt to set your scheduled deposits, investments, and reinvestments in index funds and then not look back for years. This approach avoids the risk of trying to time the market – automation helps tremendously in this regard.
So the hardest part is getting started as early as possible and staying committed to your automated plan for as many years as possible. Even if you have to make some tough spending decisions to make it happen, it’s worth the sacrifice in the long run.
10 Stocks We Like Better Than SPDR S&P 500
When our award-winning team of analysts has stock advice, it’s worth listening to. After all, the newsletter they have published for over a decade, Motley Fool Stock Advisorhas tripled the market.*
They’ve just revealed what they think are the top ten stocks investors can buy right now…and the SPDR S&P 500 wasn’t one of them! That’s right, they think these 10 stocks are even better buys.
*Stock Advisor returns from August 17, 2022
James Brumley has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.