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Stocks are often recommended for building long-term wealth due to their potential for significant growth over time. However, their daily fluctuations can be unpredictable.
Here's how to approach making money with stocks effectively:
- Adopt a Buy-and-Hold Strategy
"Time in the market beats timing the market" is a principle many long-term investors follow. Instead of frequently buying and selling stocks, which can lead to missed opportunities, consider holding onto your investments for the long term. Research shows that remaining invested over time yields better returns compared to attempting to time the market:
- Investors who stayed fully invested from 2002 to 2017 achieved an annual return of 9.9%.
- Missing the 10 best days during this period reduced returns to 5% annually.
- Missing the 20 best days dropped returns to 2%.
- Missing the 30 best days resulted in an average annual loss of -0.4%.
Since predicting the best days for the market is nearly impossible, maintaining a long-term investment approach can help capture the market's best performance days.
- Diversify with Funds
Diversification is a key strategy for reducing risk and potentially increasing returns. Instead of investing in individual stocks, consider funds that spread your investment across a range of securities. This reduces the risk associated with any single investment and can provide more stable returns over time.
- Reinvest Dividends
Reinvesting dividends can significantly enhance your returns. While dividends may seem small initially, they contribute to a substantial portion of overall stock market growth. For instance, reinvesting dividends in the S&P 500 from 1921 to 2021 increased annual returns from 6.7% to nearly 11%. Reinvesting dividends buys additional shares, which compounds your earnings.
- Choose the Right Investment Account
The type of investment account you use can impact your overall returns. Select an account that aligns with your financial goals and offers tax advantages where possible. For example, retirement accounts like IRAs provide tax benefits that can enhance your long-term returns.
The Bottom Line
To make money with stocks, focus on long-term investing rather than short-term speculation. Emphasize strategies like buying and holding, diversifying your investments, and reinvesting dividends. Even successful investors like Warren Buffett advocate for low-cost index funds and a patient, long-term approach to investing.
