If you settle for average in your stock market investing, you might do surprisingly well. After all, the long-term average annual return of the stock market is close to 10%. Investing, say, $12,000 per year for 20 years and earning a 10% return would get you more than three-quarters of a million dollars.
You might be able to do even better than that, though. Here are three ways to shift your portfolio into overdrive.
Image source: Getty Images.
1. Add some growth stocks to your mix
First, understand that you never have to settle for below-average results. You can always earn roughly the market’s return by parking your money in a low-cost index fund. There’s no shame in that, as even Warren Buffett has recommended index funds for most investors — and over long periods they have outperformed the vast majority of their more actively managed mutual fund counterparts.
You can aim for higher-than-average returns, though, by including some growth stocks in your portfolio. Choosing to invest in individual stocks with a meaningful portion of your portfolio means learning how to evaluate companies and committing to continual learning, in order to improve your results. For best results, the Motley Fool’s investing philosophy would have you spreading your money across at least 25 promising stocks for at least five years. That way you’ll have a greater chance of hitting it big with at least one or more terrific performers.
Growth stocks are ones tied to companies that are growing at a faster-than-average rate. Thus, they have the capability of seeing their stocks soar, since stock prices are ultimately tied to company performance, at least in the long run. You don’t want to buy them at any price, though, because growth stocks can sometimes be trading at nosebleed levels. Instead, seek out those trading at reasonable valuations, given their growth prospects.
2. Consider dividend stocks — and reinvest those dividends
Another way to juice your portfolio is to add dividend-paying stocks. Dividends can be very powerful, as healthy and growing companies will tend to increase their dividend payouts over time, paying their shareholders in both good economies and bad. If you have a $100,000 portfolio with an overall dividend yield of, say, 4%, you’ll be collecting $4,000 annually — without doing any work for it. On top of that, you can hope and expect that the underlying stock will appreciate over time, as well.
As your portfolio grows over time and you approach and enter retirement, dividends can be even more valuable. A portfolio worth, say, $500,000 with an overall dividend yield of 3.5% will deliver about $17,500 in annual income — roughly as much as the average Social Security annual benefit.
You can, of course, add both growth stocks and dividend payers to your portfolio, and in many cases they can be the same stocks. Fairly rapidly growing companies such as Starbucks, Microsoft, Corning, Broadcom, and Cisco Systems all pay dividends.
Image source: Getty Images.
3. Employ the magic of time
Finally, there’s time. You can get much more out of your portfolio — even if you stick with just broad-market index funds — simply by giving it lots of time to grow. Check out the table below, which shows how much a one-time investment of $10,000 can grow, at an average annual rate of 10%:
Over this period…
$10,000 will grow to:
5 years
$16,105
10 years
$25,937
15 years
$41,772
20 years
$67,275
25 years
$108,347
30 years
$174,494
35 years
$281,024
40 years
$452,592
45 years
$728,905
50 years
$1.1 million
55 years
$1.9 million
60 years
$3.0 million
Data source: Calculations by author.
Notice that while it grows by about $10,000 between year five and year 10, it grows by more than $40,000 between years 20 and 25, and by more than a million dollars between years 55 and 60. That’s the power of compounding — and time.
If you don’t have too many decades before retirement, you can aim to juice your portfolio by making outsized contributions to it each year — even if that means taking on a side gig or two for a short or long while.
You have it within your power to aim for much-better-than-average investment returns, if you choose to do so.
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Teresa Kersten, an employee of LinkedIn, a Microsoft subsidiary, is a member of The Motley Fool’s board of directors. Selena Maranjian owns shares of Microsoft and Starbucks. The Motley Fool owns shares of and recommends Microsoft and Starbucks. The Motley Fool recommends Broadcom Ltd and Corning and recommends the following options: short October 2021 $120 calls on Starbucks. The Motley Fool has a disclosure policy.
