Investing in the stock market is one of the smartest and most effective ways to build wealth over a lifetime. With the right strategy, it's possible to become a stock market millionaire or even a multimillionaire -- and you don't need to be rich to get started.
It can be daunting to invest your savings, especially when the market is volatile. But investing is less risky than you may think. And by following these three simple rules, you'll be on your way to generating long-term wealth.
Image source: Getty Images.
1. Start investing early
The best way to make money in the stock market is to invest for the long term. In other words, buy strong investments and hold onto them for as long as possible -- ideally at least a few decades.
To give your money as much time as possible to grow, it's best to start investing as early in life as you can. Of course, if you're off to a late start, you can't go back in time. But starting to invest now is better than waiting, even if you don't have much cash to spare.
Say, for example, you're 35 years old and are just beginning to invest. Right now, you can afford to invest $200 per month, and your investments are earning a 7% average annual rate of return. At that rate, you'd have around $227,000 saved by age 65.
Now, let's say that instead of starting to invest at age 35, you waited until age 45. At that age, though, you can afford to invest $400 per month, while still earning a 7% average annual return. In this scenario, you'd have roughly $197,000 at age 65. Even though you're investing twice as much each month, your savings would still fall short of what you'd have by starting to save earlier in life.
2. Put your money behind stocks
The stock market is famous for its volatility, and putting your life savings behind stocks can seem risky. However, stocks will help your money grow much faster than more conservative investments.
Bonds, CDs, and high-yield savings accounts may be less volatile than stocks, but they also have significantly lower returns. Bonds may only yield returns of around 4% or 5% per year, and even the best high-yield savings accounts pay interest rates of around 1% per year. That likely won't even keep up with inflation, meaning your money could lose value over time in a savings account.
The S&P 500, on the other hand, has earned an average rate of return of around 10% per year since its inception. While the stock market does have its ups and downs, if you leave your money invested for several decades, you're likely to earn much higher returns than if you'd invested more conservatively.
It's still important to make sure you're investing wisely, however, because not all stocks are created equal. Do your research before buying, and only invest in stocks that are more likely to experience consistent growth over time.
3. Diversify your portfolio
Diversifying your portfolio involves buying multiple stocks from a variety of industries to limit your risk. This way, if one or two of your stocks don't perform well, it shouldn't have a drastic effect on your overall portfolio.
If you're buying individual stocks, try to invest in at least a dozen or so different companies from multiple industries. If you're buying funds, like mutual funds or ETFs, that can make it easier to diversify, since each fund may contain hundreds of stocks. However, it's still a good idea to make sure the funds contain stocks from a variety of industries. Even if you're invested in hundreds of stocks, if they're all from one sector, that increases your risk.
It's possible to make a lot of money in the stock market, as long as you have the right strategy. Regardless of how much you can afford to invest, these three guidelines can help you start building wealth today.
