Turn Tiny Savings Into Huge Riches

As the old saying goes, it takes money to make money. The good news for small investors, though, is that it only takes a little bit of savings to add up to a lot of money over the long run. Even when the market isn't behaving well, a consistent approach to saving and investing can give you the returns you need to become financially independent.

Do small investors stand a chance against Wall Street?
Unfortunately, the idea that even investors with only modest savings can accumulate enough wealth to reach lofty financial goals has come under fire lately. As the bear market ravaged investors' portfolios, many lost confidence in the ability of individual investors to manage their own money at all.

In particular, 401(k) plans and other savings vehicles that put the responsibility for making investing decisions squarely on individuals have received a great deal of criticism. In the face of big market losses, some critics have become convinced that the best solution is to return to the days when the combination of government payouts like Social Security and employer pensions gave workers a worry-free retirement cushion without having to manage any of their own finances. Otherwise, ordinary investors will inevitably fall prey to Wall Street's cunning and devious tactics to separate them from their money.

Bear market myths
The thing is, though, that bear markets don't necessarily prevent disciplined small investors from accumulating vast fortunes. In fact, by investing steadily throughout your lifetime, you can match or even surpass the amount of money that richer investors accumulate -- even if you don't have the same resources they do.

In this month's brand new installment of The Motley Fool's Rule Your Retirement newsletter, which will be released to readers today at 4 p.m. ET, Fool retirement expert Robert Brokamp questions the conventional wisdom that investing most of your retirement savings in stocks is the best way to build wealth. Although no one would dispute that stocks are the best place for your money during good times, the fact that major stock indexes have gone nowhere over the past 10 years has given everyone pause about whether the advice they're following is painfully out of date.

The conclusion Brokamp draws is that the right combination of stocks can beat even a bear market. That's welcome news for frustrated investors.

Little by little
But even more encouraging is another of Brokamp's discoveries. In the newsletter, you'll find a comparison of two investors during the long secular bear market from 1965 to 1981. One started with a $10,000 lump sum but never saved another penny. The other started with the same $10,000 but added an extra $1,000 each year (adjusted for inflation). As you'd expect, the investor who kept adding money had a bigger portfolio at the end -- around two and a half times bigger than the one-time investor.

Look closely at those numbers, though, and you'll discover something even more important: You didn't need that initial $10,000 to succeed. Even if you only made the $1,000 annual investment, you ended up with a significantly bigger nest egg than the rich one-time investor. Investing small amounts each year far eclipsed what a large one-time investment produced.

Why it works
As Brokamp discusses, there are a variety of reasons why regular saving works well. But one that hits home right now is the fact that regular savers automatically take advantage of good opportunities.

For instance, during the market meltdown last fall and this past March, investors saw some of the biggest bargains of the decade. Even big-name companies were bid down to fire-sale prices. Just look at how low these stocks went compared with their levels throughout the rest of the decade:

Source: Yahoo! Finance. Prices are not adjusted for dividends.

Few investors had the nerve to invest big lump sums into the market near its lows. But if you had a slow but steady investment program in place, you picked up a few shares at incredible bargains. If the stocks keep improving as they have since their lows, then the bargain shares you picked up will be among the best investments you ever make.

Don't give up
Despite the overall pessimism toward the chances small investors have of becoming wealthy, investing still has the potential to bring you riches. Over time, regular small additions can overwhelm even gigantic one-time investments. Time is the great equalizer, and if you use it to your advantage, you can do truly amazing things with your money.