Fact is that you can’t get rich quickly in the stock market unless you are both, extremely foolish and extremely lucky. But what you can do, if you are smart, is generate a reasonable amount of short-term income while you are building up wealth for retirement that will cover all of your lifestyle expenses after you stop working.
What do you have to do to generate long-term wealth?
Here we go:
1. The power of compounding
Compounding works like this: You put your money in an investment that pays a return. At the end of the year, you take that return and reinvest it with your original stake. Your dividend (or interest) earns a return too. This gives you a bigger, compounded return in the next year.
Compounding is slow and boring at first, but as time passes, the dividends get exponentially larger. Eventually, you wake up to discover that you are making huge dividends every year, while your account grows to an enormous size.
Not only is compounding the best way to build long-term wealth, but it is also the easiest. You can take full advantage of compounding without watching the markets every day or setting stop losses or hedging your bets. Just choose the investment or asset class that compounds best.
2. The best-performing asset of all time
The answer to that question is easy. Compounding works best with stocks. Jeremy Siegel, a professor of finance at Wharton School Pennsylvania studied the returns of different types of asset classes, like cash, gold, Treasury bills, bonds and stocks over a 211-year time frame.
The results were astonishing. From 1802 to 2013 $ 1.00 invested in cash would be worth $0.05, in gold $3.21, in treasury bills $278, in bonds $1,505and in stocks an astonishing $930,550.
But 200 years is a long time. As we want to build wealth early on for retirement, we will look at a period of over 50 years.
Between 1950 and 2003, a $3,000 investment in the S&P 500 would have given you a return of $1,323,936. That’s very impressive. But had you invested that same $3,000 into three “household name” companies with enduring, competitive advantages, your total return would have been $5,080,054!!!
$ 1,000 invested turned into: $2,042,605 in Kraft Foods, $1,774,384 in R.J. Reynolds Tobacco, $1,263,065 in Exxon Mobil.
These 3 stocks outperformed a broad stock market index fund by 4 times. Why? It’s very simple. They all focused on basic human desires and necessities. Things such as food, cigarettes and fuel. They all had enduring competitive advantages.
3. The 5 benefits of investing this way
To get the full rewards of a long-term strategy, you need to follow some rules. You need to select only very safe and very protected businesses. And you need to stick with them regardless of yearly results. If you do, you will benefit enormously from a number of things.
a) Power of compound interest.
b) Simplicity. You don’t have to regularly monitor the markets or even worry which way they are going. You can pretty much set up your portfolio and leave it be.
c) Peace of mind. You don’t worry about stock market fluctuations, not even big ones.
d) Paying unnecessary fees to money managers, brokers and financial planners. Over time, the fees siphoned away by these professionals erode your wealth significantly.
e) this strategy will keep you from being too conservative with your money. One of the greatest risks you run is losing money to inflation in overly conservative investments such as cash, CDs, money market funds and bonds. By investing in the best companies in the world, you’ll grow your money at much higher rates of return.
So, created a portfolio of some of the best businesses in the industry and invested your money in them. Do it in the long run and re-invest the dividends automatically. If you invest this way, when you stop working and even if the market crashed, probably, the dividends alone from these stocks will still pay for your living expenses.
Sven Franssen