Unfortunately, you can’t wave a wand and expect large sums of money to pop up in your bank account. However, you can implement investment strategies that, when done correctly, can produce those same results over time. In fact, the popular S&P 500 index of stocks has earned an 11.9% average annual return since 1928.
Here are three magical investing strategies to grow your money.
1. Let time work its magic
To really take full advantage of investing, investors should understand the huge role time can play and let compound interest do a lot of the heavy lifting. Compound interest occurs when the money you earn on investments begins to earn money on itself, and many millionaires have it to thank for their wealth. If you were to make a one-time $10,000 contribution into an investment that returned 10% annually, you would accumulate over $108,000 in 25 years without contributing any additional money.
Here’s how much you would roughly have at different years if you contributed $6,000 annually (the current IRA contribution limit for people under 50) into that same investment:
The growth in the “account total” 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 give it, the better. After 30 years, you would have personally contributed $180,000, yet your account total would be about $800,000 more than that amount.
2. Factor in small-cap and mid-cap stocks
As companies grow, their room for exponential growth tends to shrink. Large-cap companies may have more stability, but the chance for hypergrowth likely isn’t there. That’s where small-cap companies come into play. Small-cap companies are riskier because they have higher volatility and a greater chance of financial issues, but they also give investors a chance at higher returns.
Regarding growth potential and stability, mid-cap stocks are kind of the sweet spot. They’re small enough to still have room for exponential growth, but they’re also large enough to have more resources than many smaller companies. You don’t want small-cap and mid-cap stocks to dominate your portfolio because of their riskiness, but a solid portfolio should have some exposure to them.
Larger, more established companies should likely be the core of your investments because of their stability, but as an investor, it doesn’t hurt to give yourself a chance to invest in companies with hypergrowth potential. If you want to minimize some of the risks, consider small-cap and mid-cap index funds, so you’re exposed to companies spanning various industries and have diversification.
3. Focus on Dividend Aristocrats
Dividends are a way for companies to reward their shareholders for holding on to their investments. If you’re investing in financially sound companies, you should be able to count on dividends as consistent income, regardless of what may be happening with their stock price.
Dividend Aristocrats are companies belonging to the S&P 500 that have increased their annual dividend payouts for at least 25 consecutive years. Because they’ve managed to increase their dividends for that long, you know the company has stood the test of time and made it through stock market downturns, recessions, and other sub-optimal economic situations.
Following the above example, where you contribute $6,000 annually with 10% returns, here’s how your account total would look if you added a 2% dividend yield that you reinvested back into the stock:
Account Total Without Dividend Yield
Account Total With Dividend Yield
Even adding a seemingly low dividend yield can pay off huge over time when combined with the effects of compound interest. When done the right way, dividends can make up a large portion of your returns on investment, and they’re also a good way to set yourself up to receive noticeable supplemental income in retirement.
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