The stock market can be intimidating, especially if you're not an expert investor. But it's also a wealth-building powerhouse, and the right strategy can help you accumulate hundreds of thousands of dollars (or more) over time.
It's also not as challenging as it may seem to make money in the stock market. In fact, the secret to building wealth requires next to no effort on your part, and it involves harnessing the power of compounding.
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What are compound earnings?
Compound interest is essentially when you earn interest on your interest. The more your account balance grows, the more you'll 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 earnings can supercharge your savings with very little effort. All you need to do is invest as much as you can afford, then leave your money alone for as long as possible. The more time you give your savings to grow, the more you'll accumulate.
For example, say you invest $1,000 in an S&P 500 index fund earning an average rate of return of around 10% per year. Assuming you don't touch that money and don't make any additional contributions, that $1,000 could grow into nearly $7,000 after 20 years.
To earn significantly more, you can continue investing a small amount each month. Say, for instance, you invest your initial $1,000, but you also invest $200 per month. Assuming you're still earning a 10% average return, you'd have roughly $144,000 after 20 years.
| Number of Years | Total Savings When Investing $200 per Month, Earning a 10% Average Annual Return |
|---|---|
| 10 | $41,000 |
| 15 | $80,000 |
| 20 | $144,000 |
| 25 | $247,000 |
| 30 | $412,000 |
| 35 | $679,000 |
Source: Author's calculations via Investor.gov.
Time is your most valuable resource when it comes to compound earnings. 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 manage market downturns
The most important thing to remember when investing in the stock market is that it's 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's normal.
Despite this volatility, it's best to continue investing anyway -- even when the market is in a slump. While your portfolio could lose value during market downturns, you don't actually lose any money unless you sell your investments.
Regardless of what the market is doing, 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's ever faced, and it's extremely likely that it will recover from future downturns, too.
By simply waiting it out and continuing to invest like normal, 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 long-term wealth, and compound earnings can supercharge 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 while barely lifting a finger.
