[ad_1]
Becoming a good investor is a lifelong process; different markets and economies teach us new things every day. Each individual company and its stocks are constantly changing with the markets and through the people that work there. This is why the markets are so endlessly interesting and fascinating.
While there are indeed complexities in investing, there are also some basic truths that make it relatively simple to not only start investing but also be successful at it. When you understand these truths, you can grow your retirement savings by a factor of 10 without much effort at all.
Compounding puts your money to work
Compounding is a huge force in growing your money. It refers to the way your investment returns generate additional earnings each year without your lifting a finger.
Let’s say you invested $50,000 in an exchange-traded fund (ETF) that tracked the stocks in the S&P 500. The S&P 500 includes the 500 largest companies in the U.S. It is the standard by which U.S. markets are measured.
Image source: Getty Images.
While the S&P 500 is down this year by about 19%, keep in mind that this is an unusually bad year, the worst since the Great Recession; it fell 38% in 2008. Since then, the S&P 500 has only gone negative in three years, including this one. It was positive or flat in 11 of the years since 2008. Over time, the S&P 500 has returned about 10% per year.
Let’s say that $50,000 has a total return of 10% — its historical average — next year. That $50,000 would grow to $55,000 without any contributions. The following year, if it gained another 10%, it would be on top of the $55,000, including the $5,000 that you earned the previous year. Your gains would be $5,500 instead of $5,000, and your initial $50,000 investment would be up to $60,500 after two years. That, in a nutshell, is compounding — your earnings generating earnings.
How you can 10X your investments
If you pull back the lens and take a longer view of compounding at work, you can see how your investment can grow exponentially without you having to do anything. After 10 years, an annual total return of 10% would grow to about $130,000. After 20 years, it would reach about $336,000, and after 25 years, you would accumulate roughly $541,000 — more than 10 times your initial investment, with the bulk of it coming through compounding.
If you wanted to get there a little quicker, you could set up a $50 per month automatic contribution to the ETF. Using the same inputs, you’d 10 times your initial investment in about 22 years, in that case.
Now, you can’t assume that the S&P 500 will return 10% over the next 25 years — it might be more, or it might be less. But we do know that bull markets have historically lasted longer than bear markets and generated returns that far outpace the losses from bear markets.
The key is to be patient and not try to time the market by switching in and out of investments. For one thing, that’s a lot of work. And for another, it’s typically not successful, as trading when investments are down only locks in your losses. The market will turn, and it may not even be next year to any significant degree. But history tells us that it indeed will.
The $18,984 Social Security bonus most retirees completely overlook
If you’re like most Americans, you’re a few years (or more) behind on your retirement savings. But a handful of little-known “Social Security secrets” could help ensure a boost in your retirement income. For example: one easy trick could pay you as much as $18,984 more… each year! Once you learn how to maximize your Social Security benefits, we think you could retire confidently with the peace of mind we’re all after. Simply click here to discover how to learn more about these strategies.
The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
[ad_2]
Image and article originally from www.nasdaq.com. Read the original article here.