Everyone is aiming for a particular financial goal. No matter what yours is, it would be easier to reach if you could multiply your wealth several times over. We asked our Motley Fool investing experts the best way to get rich buying stocks.Here's what they had to say.
Getting rich in the stock market is simple but not easy. The best approach is to patiently and regularly put money to work in tax-advantaged savings accounts, particularly 401(k)s in which your employer matches your contributions. It's crucial that you take full advantage of matching contributions, because they are essentially an instant 100% return on your investment. Assuming average stock market returns of 8% a year, it would take a little over nine years to double your investment on your own. So with a full employer match, you're nine years ahead of the game.
One of the best things about 401(k) plans is that they are a form of dollar-cost averaging -- that is, investing a set dollar amount at regular intervals. These regular, invariable contributions help you take advantage of the ups and downs of the market; when the market dips, your money will buy you more shares at deflated prices, and when the market gets frothy, that same amount will buy fewer shares at high valuations. This helps you avoid the costly mistake most investors make, which is buying and selling too actively in an effort to time the market.
Getting rich buying stocks is not easy -- otherwise, everyone would be rich. But you can make it easier by regularly investing and taking advantage of your employer's 401(k) matching.
As Dan pointed out, there's arguably no better way to build wealth over time than by investing consistently. However, that raises this question: what to invest in?
One of the simplest options is to invest in a low-fee S&P 500 index fund; however, investors interested in owning individual stocks ought to consider focusing on companies that are innovating. For example, when Motley Fool co-founder David Gardner bought shares in Amazon.com (NASDAQ:AMZN) in 1997, the company didn't have a long record of financials to dissect or a steady stream of dividends to bank on.
What Gardner saw was Amazon's potential to revolutionize how America shops. Investing in that kind of company poses some risk, but it can also deliver outstanding rewards -- after all, Amazon became Gardner's first 100-bagger in 2013.
Which company could be the next Amazon of its industry? Investors should concentrate on businesses that they can understand and that are led by dynamic leaders who are changing the way industries work. Other examples include Netflix (NASDAQ:NFLX) and Tesla (NASDAQ:TSLA).
Innovative companies can certainly pay off big-time, but don't underestimate the wealth-building potential of "boring" stocks, which I believe can be the most certain way to get rich.
By "boring" stocks, I refer to companies that are large and predictable and don't have explosive growth potential. These are companies with excellent products and brand recognition that grow their earnings and dividends consistently.
Consider Procter & Gamble (NYSE:PG). The company has a large and diverse portfolio of products, including such brand names as Gillette, Charmin, Pampers, and Tide. Consumers know and trust these products, which gives Procter & Gamble a consistent revenue stream, and strong pricing power. Simply put, consumers are willing to pay more for products they perceive as high-quality.
Over the past 20 years Procter & Gamble has averaged total returns of nearly 11% per year, handily beating the S&P 500's 9.5% average. To illustrate the amazing long-term power of such returns, let's say you invested $5,000 per year for 30 years (a total investment of $150,000) and earned 11% per year. You'd end up with about $1 million.
A stock's past performance doesn't guarantee future results, but my point here is that just because you consider a company boring doesn't mean it will produce "boring" returns.