In a recent interview, Motley Fool CEO Tom Gardner said, "The stock market is a bank that pays a higher interest rate than your bank ever will." However, he prefaced this with the fact that not every investment you make is going to go up, and you're not going to have a positive return each and every year.
In fact, Gardner said that if you buy 25 stocks, you need to be comfortable knowing that five of them are likely to be big disappointments. He added that he understands why some people can get intimidated by the stock market, but if you can get past that fear, then you can build a lot of wealth over time. Two of the keys are finding enough good companies to invest in and keeping at it.
Finding winners
The S&P 500 index generated an average annual return of 10.5% over the past 30 years from 1995 to 2024. With banks notorious for paying very low interest rates and even high-yield savings accounts and money market funds currently paying rates less than 5%, investing in the stock market is highly likely to give you a better return over the long term.
Investing in individual stocks is also not easy, as Gardner points out, and you are inevitably going to have your fair share of losers along the way. In fact, a J.P. Morgan study found that between 1980 and 2020, 40% of the stocks in the Russell 3000 index, which consists of the 3,000 largest companies in the U.S., suffered a "catastrophic stock price loss," which it defined as a 70% drop in price from which a stock never fully recovered. In addition, the study found that two-thirds of stocks underperformed the index and 40% of stocks had negative returns.
That's some pretty scary stuff, but remember the stock market as a whole put up some strong returns during this period. How could that be when most stocks underperformed? The answer is that big winners helped power the market returns. These represent about 10% of the stocks in the Russell 3,000 and accounted for most of the index's gains over this period.
So as Gardner notes, find enough good companies to invest in and you can generate some pretty strong returns over time. There are a lot of well-known names that have been big winners over the years. This includes Amazon, Walmart, Starbucks, Chipotle Mexican Grill, Alphabet (Google), Meta Platforms (Facebook), Netflix, Apple, and Microsoft. These are companies with pretty recognizable businesses that aren't too difficult to understand, so you don't need to be turning over rocks looking for obscure companies no one has ever heard of to find eventual megawinners. They are often right in front of your face.
Image source: Getty Images.
The ETF route
Of course, if investors don't want to invest in individual stocks, investing in an index exchange-traded fund (ETF) is another good option. An ETF like the Vanguard S&P 500 ETF (VOO +1.00%) will give you instant diversity with a portfolio of approximately 500 stocks, and look to replicate the performance of the S&P 500 index, which is widely considered the barometer of the U.S. stock market.
The S&P 500 is a market capitalization weighted index, which means that the bigger a company gets (shares outstanding multiplied by share price), the larger a percentage of the index it becomes. This plays perfectly into benefiting from megawinners, as the index naturally lets these megawinners run and become bigger contributors over time.
The Vanguard S&P 500 ETF has a strong track record and is a low-cost way to mimic the performance of the S&P 500 index, which, as noted, is sure to give you a better return than a bank over time. ETFs are also great investment vehicles to use a dollar-cost averaging strategy with, where you invest money each month at a set amount no matter how the market is performing.
Whether you choose individual stocks or ETFs, you want to continue to invest in both bear and bull markets. Investing in bear markets can get you some great prices, while the stock market often will set new floors in bull markets. A separate J.P. Morgan study actually found that the S&P 500 hit highs on 7% of trading days since 1950 and that almost a third of the time, this marked a new floor for the market.
So while the market will have its ups and downs, over the long term, it is one of the best ways to build long-term wealth, and is a surefire way to get you a better return than you ever will at your local bank.
