I've spent enough time in Fooldom pressing people to get their acts together and finally start investing. But, to a great degree, I'm probably preaching to the choir.
Still, maybe I can help you turbocharge your portfolio a little.
Start by stepping back to review your portfolio and all the assets that make up your net worth. If you're a homeowner, good. Homes can help you build great value over time, plus you can eat and sleep in them -- try doing that in a stock certificate, or even in the warehouse of a company whose stock you own. Don't expect your real estate to make you rich, though. Sure, many people do very, very well in it, but they tend to be people who really know real estate, and who happen to have invested in the right places at the right time.
Overall, according to Dean Baker, co-director of the Center for Economic and Policy Research, housing prices have appreciated at pretty much the same rate as inflation between 1950 and 1995.
CDs and bonds and alpacas
Your house is not all you have, though, right? Have you invested in CDs? Or in bonds? Or even in an alpaca farm? Well, CDs and bonds can be great for short-term savings, and for when you don't want to take on much risk. (Though bonds -- junk bonds in particular -- can be risky.) As for alpacas, well, I confess I don't know much about them. (But the fellow who prepared this website does, although perhaps he's making more from selling guidance than he is from selling alpacas.)
So let's return to bonds, shall we? As referenced in Jeremy Siegel's book, Stocks For the Long Run, here's what $1 invested in various items in 1802 would have grown to by 2001. (Yes, we're talking about almost 200 years!)
|
Not adjusted for inflation |
Adjusted for inflation |
|
|---|---|---|
|
Stocks |
$8.8 million |
$599,605 |
|
Bonds |
$13,975 |
$952 |
|
Bills |
$4,455 |
$304 |
|
Gold |
$14 |
$1 |
The stock market
So it should be clear by now that stocks are, for many (if not most) people, the best road to wealth. Over the long haul, though, the stock market has gained an annual compound average of about 10%. That's enough to help you build a small fortune:
- It will turn $10,000 into $67,000 in just 20 years.
- It will turn $50,000 into $542,000 in just 25 years.
- It will turn $100,000 into $1.7 million in just 30 years
See? Small fortunes. (Except for the $1.7 million, but that will take quite some time, and you'll have to start with a bit of a fortune.)
The good news is that you can earn even more than the amounts I listed. How? By continually adding to your investments over time. Given that, most of us would do well to park much of our long-term money in a simple broad-market index fund, such as one based on the S&P 500.
Do even better
But we should aim to beat the market -- by adding some carefully selected mutual funds or individual stocks to our portfolio. Your index fund might grow at 10% annually for 20 years, turning $10,000 into $67,000. But $10,000 parked in a stock that averages 14% growth over 20 years will turn into $137,000 -- roughly twice as much!
But there's a problem. How do you go about finding stocks with great growth potential and reasonable prices? One way is to screen for them. I recently screened for companies with net profit margins of at least 10% (to make sure the companies are getting a good chunk of revenue to the bottom line), five-year estimated growth rates of at least 10% (to make sure they'll a fair bit faster than the rate of inflation), and price-to-earnings (P/E) ratios of less than 20 (to make sure the stocks are cheap to reasonably-prived). Here are some companies that popped up:
|
Company |
Profit margin |
5-year growth |
P/E |
|---|---|---|---|
|
3M |
17% |
11% |
15 |
|
Apollo Group |
17% |
15% |
19 |
|
Illinois Tool Works |
12% |
13% |
17 |
|
Starwood Hotels |
17% |
15% |
14 |
|
American Express |
14% |
13% |
19 |
Those numbers are promising, but they're not enough. You have do a lot more digging into each candidate before making any decisions. I looked into some of these outfits on our CAPS service and though they generally received very high marks, I found some interesting bearish food for thought.
Tap advisors' help
If you don't have the time, the stock-savvy, the energy, or just the interest to spend hours poring over financial statements, you might want to take advantage of the advice of some stock analysts such as Fool co-founders David and Tom Gardner, who have been running our Motley Fool Stock Advisor service for five years. Their recommendations have gained an average of 64% versus 26% for the S&P 500. I invite you to try them out for free for 30 days, during which time you'll have full access to all past recommendations and issues.
Here's to shooting for large fortunes instead of small ones!
Selena Maranjian owns shares of 3M, which is a Motley Fool Inside Value recommendation. The Motley Fool is Fools writing for Fools.
