Unfortunately, you can’t wave a magic wand and expect large sums of money to appear in your bank account. However, you can implement investment strategies that, when done correctly, can produce the same results over time. In fact, the popular S&P 500 stock index has posted an average annual return of 11.9% since 1928.
Here are three magical investment strategies to grow your money.
1. Let time do its magic
To get the most out of investing, investors need to understand the huge role that time can play and let compound interest do much of the heavy lifting. Compound interest occurs when the money you earn on investments starts earning money on its own, and many millionaires have you to thank for their wealth. If you were to make a one-time contribution of $10,000 to an investment that returned 10% per year, you would accumulate more than $108,000 in 25 years without contributing any additional money.
Here’s what you’d have roughly in different years if you contributed $6,000 a year (the current IRA contribution limit for people under age 50) to that same investment:
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|years invested||personal contributions||bill total|
The growth in the “total account” column really shows the power of compound interest. After 15 years, you would have $100,000 more than you personally contributed. And the more time you spend on it, the better. After 30 years, you would have personally contributed $180,000, but your account total would be about $800,000 more than that.
2. Consider small- and mid-cap stocks
As companies grow, their room for exponential growth tends to shrink. Large-cap companies may have more stability, but the potential for hypergrowth is likely to be absent. That’s where small caps come in. Small-cap companies are riskier because they have higher volatility and a greater chance of financial trouble, but they also give investors the opportunity to earn higher returns.
In terms of growth potential and stability, mid-cap stocks are the sweet spot. They’re small enough to have room for exponential growth, but they’re also big enough to have more resources than many smaller companies. You don’t want small- and mid-cap stocks to dominate your portfolio because of their risk, but a strong portfolio should have some exposure to them.
Larger, more established companies should probably be the core of your investments due to their stability, but as an investor, it doesn’t hurt to give yourself the opportunity to invest in companies with hyper-growth potential. If you want to minimize some of the risk, consider small- and mid-cap index funds so you’re exposed to companies that span multiple industries and have diversification.
3. Focus on dividend aristocrats
Dividends are a way for companies to reward their shareholders for keeping their investments. If you’re investing in financially strong companies, you should be able to count on dividends as consistent income, regardless of what may be happening to their share price.
Dividend Aristocrats are companies belonging to the S&P 500 that have increased their annual dividend payments for at least 25 consecutive years. Because they have been able to increase their dividends for so long, you know that the company has stood the test of time and weathered stock market crashes, recessions, and other suboptimal economic situations.
Using the example above, where you contribute $6,000 a year at a 10% return, this is what your account total would look like if you added a 2% dividend yield that you reinvested in the stock:
|years invested||personal contributions||Total account without dividend yield||Total account with dividend yield|
Even adding a seemingly low dividend yield can pay off big over time when combined with the effects of compound interest. When done the right way, dividends can account for a large portion of your investment returns, and they’re also a great way to prepare for significant supplemental income in retirement.
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