How to Get Rich from Long-Term Investing
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For the majority of us, the ultimate goal in life is to have enough money to fulfill our dreams and enjoy our retirement without any worry. If you want to get rich and have no idea how to get started with investing, you have several options to consider. It is possible to get rich from long-term investing and all you need is money to get you started and patience to keep you going.
One of the best ways to generate wealth is by investing in the stock market. The biggest strength of this investment is that there are multiple ways you can profit from it. However, great rewards do not come without great risks, especially if you are looking to get rich. If you want to dabble in aggressive market strategies, you need to keep in mind that there is also a risk of losing some of the investable funds. There are several ways you can get rich from long-term investing but before you embark on your investment journey, have your long-term investing goals and risk tolerance in mind. Once you start on the right foot, shut out all the outside noise and forget about the funds for a few years. These tips can even help you survive a Bear Market and the stock market’s recent fluctuations.
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How to get rich from long-term investing
Here are a few ways you can enjoy outsized returns in the long term.
Start as early as you can
When it comes to getting rich from long-term investing, the trick is to start as early as possible. The longer your money remains invested, the more potential it has to grow. So, when you start early, you enjoy the compounding effects of the capital and also get an opportunity to buy and average out the cost over time. Assume that you contribute $1,500 a year to your IRA at the age of 22 and then stop at 32 whereas someone starts contributing $1,500 to your IRA in their thirties and does not stop for the next 30 years. In this case, the individual who starts in their twenties will have a higher return as compared to someone who started in their thirties. Hence, you must invest early and invest often.
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Never time the market
This is one investment advice you must always keep in mind. Do not make the mistake of timing the market in the short term. Time will be your best friend in the long run but let it handle itself. When you time the market, you make two decisions- when to get in and when to get out. It is tough to make both these decisions and obsessions about them can lead to missing out on the best investments. It could lower your returns in the long term. The best performance days of a company cannot be timed and they are usually clustered in the days right after the worst performance days. Hence, stay invested through a market cycle and enjoy better results in the long term.
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Focus on stocks
Mutual funds, bonds, and exchange-traded funds (ETFs) can be a part of your portfolio for income and stability but you must keep individual stocks as the main focus of your portfolio. With declining interest rates, stocks can be the main earner, in the form of capital appreciation and dividends. If you have a solid portfolio of growth stocks, you will enjoy capital appreciation and if you enjoy passive income, you can build a portfolio of dividend-paying stocks that can also complement the bond portfolio.
Several dividend-paying companies increase their dividend each year. Even a penny stock can be worth millions in the long term and a small-cap could become a multi-bagger over time. There is no way you can predict how Wall Street will perform in the coming months but you can certainly choose the right companies to invest in. When you compare the dividend payment with bonds that have a set interest rate, you will notice the difference in your income. The best way to build long-term wealth is to invest in the stock market.
Earn compound interest
The stock market is considered the biggest wealth generator for compound interest. You can make short-term profits in the stock market but it is safer to leave the money and let compounding do its magic over the long term. So, the longer you leave the money in the market, the lower risk you take. It is not possible to predict what the market will do from year to year but you will not lose a lot of money in long-term investing. When you think about the short-term, the market can be very volatile. So keep your money in the market for 10 to 15 years or even 20 years and you will notice that the potential to build wealth is massive.
Diversification is the key
If you are at a stage where you are wondering how to invest, you need to understand the importance of diversification before you begin. The biggest advantage of long-term investing is that time will help smooth out volatility. Investors can manage volatility with diversification. You can add bonds, index funds, real estate, or stocks in different sectors to diversify the portfolio. Even in stocks, you can consider value and growth stocks. It is important to balance the choices with a well-rounded portfolio of different assets. Gold can turn out to be a good hedge in years of high inflation. A diversified portfolio will reduce the risk of losing all your money in case of a market slump.
Rebalance when necessary
Having a solid investment strategy is about rebalancing the portfolio when necessary. Besides having the right strategy and the best-laid plan, you must also tweak the portfolio regularly. It is not the same thing as timing the market but it is about the calculated buying or selling to return your portfolio to the original financial plan. If you have a 50/50 portfolio but you have noticed a massive rally in stocks while the bonds haven’t moved at all, your original ratio could be out of whack. Hence, you may have to sell some stocks or add bonds to maintain the investment strategy. There is no specific time within which you need to rebalance the portfolio but you can do it whenever you deem fit.
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Invest in real estate
Real estate has been known for long-term wealth creation but it was not everyone’s cup of tea. Beginners do not have the funds to invest in a property and this is where real estate does not fit their portfolio. However, it is now possible to invest in real estate in different ways. You can invest in a Real Estate Investment Trust (REIT) and enjoy passive income in the form of dividends while the property appreciates. If you have the funds on hand, you can single-handedly invest in commercial or residential property and enjoy capital appreciation. Real estate investment returns are higher than any other asset in the market. However, you need to have the know-how and the ability to identify a property based on its location, and market value.
Add mutual funds to your portfolio
Besides diversification, mutual funds can generate a consistent return in the form of dividends and they grow over a period. It is best to choose an actively managed fund since its purpose is not to simply match the market index but to outperform it. You can reduce the risk while enjoying diversification. The success rate will vary and most don’t outperform the market. But it helps to invest in a solid fund with strong past performance history. You can invest in the fund through your brokerage account and if you need any assistance, you can speak to a financial advisor.
Add to the 401(k) match
You will find several investment strategies out there but there is no guarantee of not losing your money. The asset allocation should be such that you manage to balance the risks. A 401(k) can provide free money and barriers to exit, yet, many people are not willing to participate even when they have access to a 401(k) with the employer match. Set up automated payroll deductions up to a maximum amount for 401(k) and then add other investment savings to the taxable brokerage account. Take advantage of any accounts available to you including traditional IRA and Roth IRA.
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Getting rich is all about long-term investing
The best strategy to get rich from investing is buying and holding. It helps generate wealth from stocks and the secret is the power of compounding. Warren Buffet did not get rich overnight, he held his investments for years. You will see the benefits when you start to receive returns on the investment in the form of dividends and profit from capital gains. With time, the investment will compound but the biggest perk of a buy and hold strategy is that it can withstand some missteps. If you have a well-structured portfolio, it will stand up to the market volatility and short-term downturns while bringing in nice returns.
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The power of a good investment
Never underestimate the power of a good investment and compounding. Let us imagine you invested in the Apple IPO in 1980 for $22 a share. This was a time when Apple Inc. wasn’t as popular and successful as it is today. So, instead of buying a new appliance or investing in your home, you invested $1,000 in the IPO. This investment would be worth $6,227 today, excluding the dividends and the stock split.
This is the power of a good investment, it can survive mistakes and disasters. Your stock holding would have more than doubled due to the several stock splits and the value of $1,000 would have increased significantly. Now, imagine you invest $10,000 in 5 different companies and 3 do not do well. So, 60% of your investment is washed out but the remaining 40% still generates income for you. So, you did great overall. Avoiding the risk of a wipeout is the key. Even if things do not go as planned, hold on to your stock during depressions, recessions, pandemics, and liquidity crunches.
According to the Microsoft investment calculator, If you had invested $1,000 in Microsoft IPO in 1980, you would have a whopping $72,737,270 in value today! This is the potential of a single stock in making you rich!
Most people might not have held their Apple or Microsoft stock for all these decades, some could have bailed out after doubling the money and could have missed out on the massive gains they could have made. This is where long-term investing makes all the difference. The rise and fall of a company aren’t apparent when you make an investment but the idea is to hold it through the ups and downs without acting on fear or emotion. Do not base your decisions simply on the stock price. Consider the fundamentals of the company and look at the past performance before you pick them.
Long-term investing is not an easy ride and it can also bring pain but it is worth it in the long haul.
The bottom line
Wealth management is all about investing in the right assets and holding them for the long term. There is no sure-shot way of getting rich but if you can take the risk and make the right investment decisions, you will enjoy better than the average annual returns. You need to remain patient and hold your investments for the long term.
Do not panic sell and continue to rebalance the portfolio. You need to be prepared to ride out the ups and downs since they are a part of the investing game. Your investment will fall in value due to several factors but if you hold them for the long term, there is a high chance of recovery. The market could also turn in your favor and you could generate massive returns in 20 years. Instead of selling a stock after it gains 20%, you can hold it till it gains 100% or 200%, there is nothing to lose, right?
There is no strategy to time the market or to know which assets will perform well, the best is to go all in and hold for the long term.
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Editor
Vandita Jadeja is a financial writer and editor at Joywallet. She loves to read and write about money and brings a decade of experience from the financial industry.
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