From meme stocks and cryptocurrencies to special acquisition vehicles and initial public offerings, the past few years have proven that investors will jump on risky opportunities when they have the chance to get rich quick.
But for every investor who profited from GameStop’s soaring stock price and Dogecoin’s rise, there are many more who lost money. They experienced firsthand that while investing can be exciting, it probably shouldn’t be. In fact, some of the most successful long-term investment strategies are quite boring.
But sticking to the basics like index fund investing, dollar-cost averaging, and dividend reinvestment plans can help you slowly build wealth over time, even if it’s not as flashy as investing all your money in stocks right before they skyrocket. proven to build. So here are some of the most boring (and effective) ways to become a millionaire.
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Part 1: Index fund investment
Choosing brands can be fun. And if you choose the right one at the right time, it can be profitable. However, timing the market is extremely difficult, even for professionals.
The Wall Street Journal’s Jason Zweig recently analyzed data from research firm Morningstar and found that 81.8% of actively managed funds failed to outperform the S&P 500 index in the first half of 2024. . Going back 10 years, nearly 73% were unable to do so.
“When you pick a stock, you’re demonstrating confidence that you somehow have the knowledge that the rest of the market isn’t priced into your investment,” says Roberts, a financial advisor at advisory firm New Money. Brenton Harrison, founder of , a new problem. But choosing an index fund (a basket of securities that aims to mimic an index such as the S&P 500 or the Nasdaq Composite) means you don’t have to choose.
These funds allow you to diversify your investments, increasing the likelihood that if one sector of the index struggles, another will hold up. That’s the power of diversification, and index fund investing provides it all in one place. For example, the SPDR S&P 500 Trust (SPY) provides investors with weighted exposure to all 500 companies included in the index in one fund.
The average annual return for the S&P 500 index over the past 30 years is 10.52%, while the tech-heavy Nasdaq Composite Index, although more volatile, has returned 10.9% over the past 20 years. Funds that track these indexes have had impressive track records. The aforementioned SPY is up 1,180% since its inception on January 29, 1993, and the Fidelity Nasdaq Composite Index ETF (ONEQ) is up 823% since its inception on October 3, 2003.
Part 2: Dollar-cost averaging
If you’re contributing a portion of each paycheck to a 401(k) plan, you’re already using this simple strategy to build long-term wealth. Dollar-cost averaging is a method of investing a fixed amount of money at regular intervals, regardless of what is happening in the market at the time.
The ideal investment strategy is to buy when prices are low and sell when prices are high, but timing the market is very difficult. Over 21 years, buy-and-hold portfolios outperformed market-timing portfolios by 10 percentage points, according to a Morningstar analysis from December last year. Additionally, investors who time the market can earn higher returns by putting their money into the market when stock prices are low, but retaining their cashback when the market is overvalued. Those returns are canceled out by the loss of returns that could be gained by doing so.
That’s because investing regularly removes some of that opportunity cost risk. “Dollar-cost averaging is one of the best financial tools available to humans because it removes human error from the investment process,” Harrison says. “In exchange for feeling like you have the ability to time the market (which we don’t have), you have the best opportunity to get the best cost for your investment.”
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Part 3: Dividend reinvestment plan
The key to growing your wealth exponentially is compounding your earnings, or earning profits based on your earnings. It is so powerful that Albert Einstein called it the eighth wonder of the world.
One way to take advantage of this compounding interest is to create a dividend reinvestment plan. Abbreviated as DRIP, it involves automatically reinvesting dividends you receive from stocks and funds you own.
“Dividend reinvestment is an easy way to have something that develops itself,” Harrison says. Implementing a DRIP means increasing the growth potential of your account.
Here is Charles Schwab’s hypothesis that illustrates the power of this strategy: A $100,000 investment made in a fund tracking the S&P 500 in 1990 would have grown to more than $2.1 million by the end of 2022 if the dividends were reinvested. Should you stop reinvesting dividends? The same investment only grew by $1.1 million, or just over half that amount.
the proof is in the pudding
Combining these three strategies – index fund investing, dollar-cost averaging, and dividend reinvestment – can produce impressive results over the long term.
For example, let’s say you invest $500 each month (or $125 each week) in an index fund with a compound annual growth rate of 10%. This is slightly lower than the S&P 500’s average annual return over the past 30 years, but the fund makes quarterly payments. dividend. According to a calculator provided by the U.S. Securities and Exchange Commission, you can accumulate more than $1 million in assets over 30 years.
Specifically, investing $180,500 over 30 years using the three strategies mentioned above would generate an estimated $1,111,168.06.
Are you bored? yes. But is it effective? absolutely.
These are proven strategies that are far less risky than speculating in meme stocks, cryptocurrencies, or other high-risk assets. And if you follow through with that plan, your future self will thank you (hopefully while keeping the $1 million).
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