The stock market can be intimidating, especially if you are not an experienced investor. But it’s also a wealth-building powerhouse, and the right strategy can help you rack up hundreds of thousands of dollars (or more) over time.
It is also not as challenging as it seems to make money in the stock market. In fact, the secret to building wealth requires almost no effort on your part, and it involves harnessing the power of composition.
What is Compound Income?
Compound interest is essentially when you receive interest on your interest. The more your account balance grows, the more you earn in interest. Over time, this creates a snowball effect that allows your money to grow exponentially.
The same concept applies to investing, and compound income can boost your savings with very little effort. All you need to do is invest as much as you can and then leave your money alone for as long as possible. The more time you give your savings to grow, the more you build.
For example, say you invest $1,000 in a S&P 500 index fund with an average return of about 10% per year. Assuming you don’t touch that money and don’t make additional contributions, that $1,000 could grow to nearly $7,000 after 20 years.
To earn significantly more, you can keep investing a small amount each month. For example, let’s say you invest your first $1,000, but you also invest $200 per month. Assuming you’re still earning an average return of 10%, you’d have about $144,000 after 20 years.
|Couple of years||Total savings on an investment of $200 per month and an average annual return of 10%|
Time is your most valuable resource when it comes to compound income. By simply investing consistently for as many years as possible, the sky is the limit in terms of how much you could earn.
How to deal with market declines?
The most important thing to remember when investing in the stock market is that it is very different from a savings account. Even the safest investments experience regular ups and downs, and there will be times when your portfolio loses value. That is normal.
Despite this volatility, it is best to keep investing even when the market is in a slump. While your wallet could lose where the during market downturns you don’t actually lose money unless you sell your investments.
Regardless of what the market does, maintaining a long-term outlook can reduce your risk. The stock market as a whole has recovered from every crash, bear market and recession it has ever faced, and it is highly likely that it will recover from future downturns as well.
By simply waiting and continuing to invest, you can keep your savings on track and avoid losing money.
The easiest way to generate wealth
The stock market can be daunting at times, especially during periods of volatility. However, investing remains one of the easiest and most effective ways to build wealth over the long term, and compound income can boost your savings.
By investing consistently and keeping your money in the market for as long as possible, you can accumulate hundreds of thousands of dollars without lifting a finger.