Getting rich from the stock market is a dream shared by most Australians, and yet so few ever actually manage to achieve it.
That's because too many of them employ a short-term outlook. They see the bills piling up under the magnets on the fridge and think: 'How could I possibly even think of setting money aside to invest?'
But what if I was to tell you that a phenomenon known as 'compound interest' makes the get rich goal not only possible, but also very, very achievable…
Admittedly, compound interest is probably something you've been fighting against most of your life… It's that thing that the banks use to make what might have seemed like a small loan hard to pay off.
But the smart investors are using it to their advantage, and in a very big way. And the earlier you start, the greater the outcome will be for you and your loved ones.
Just think, that family holiday you've always dreamed of going on… Or that luxury car you've always wanted to drive… all made possible by what has for so long been your worst nightmare.
And the beautiful thing is, you don't need to have a lot of money to make compound interest work in your favour! Really all that is needed is a small capital outlay to begin with, as well as patience and a little sacrifice on a regular basis.
Like I said, there's no need to choose between those bills or your long-term wealth – you can quite easily take care of both at once.
Here's how it works…
Compound interest is a simple mathematical theory whereby interest is earned on interest.
Say you set $10 aside and it earned 10% interest over one year. You'd have gained $1 to have a total of $11. Now if you were to keep that $11 invested for another year for the same 10% return, you will have earned $1.10 and hold a total of $12.10.
Okay, so $2.10 earned in two years is pretty boring, but you get the picture. The gains start to pick up in pace as time goes on and as more interest is earned.
Now for a more exciting example…
According to a recent report by Dr Shane Oliver of AMP Capital titled: 'The power of compound interest – an investor's best friend', the Australian stock market has returned, on average, 12% per annum since 1900.
That's despite the Great Depression, two World Wars, a Dotcom bust and the more recent Global Financial Crisis…
While it is difficult to match, or beat, the market's returns consistently, it is definitely possible provided that you pick your investments sensibly… More on that in a moment…
But first, I want to highlight the opportunity that is laying right in front of you.
Say you were to set aside $10,000 to invest in the Aussie stock market, ignoring the fact that the S&P/ASX 200 Index (INDEXASX:XJO) is hovering near a six-year high, and then inject another $250 into your portfolio on a weekly basis.
(Again, it might seem like a very tough ask right now, but please hear me out – this could literally be life changing).
After just five years of 12% annual returns, that initial $10,000 investment will have turned into $106,642. Of that, a total of $31,642 will have been earned from interest alone… But believe me, it gets better…
If you were to continue with this strategy over the course of 20 years, total interest received in that time will balloon out to $910,619 to give you a portfolio worth a total $1,180,619 million.
And this is all made possible by the phenomenon of compound interest – making your money work for you.
Now we'll get to the hard part…
Picking the right stocks to help you get there!
Most investors would traditionally head towards blue-chip companies like Commonwealth Bank of Australia (ASX: CBA), Telstra Corporation Ltd (ASX: TLS) and Woolworths Limited (ASX: WOW)…
While they have performed incredibly in recent years the smart money is being diverted to far better opportunities that could reap big gains for investors who buy today – some of which are looking likely to beat the market's 12% average return…
I've got my eye on the small and mid-cap sector where there is significant growth potential. For instance, right now I like stocks like Yellow Brick Road Holdings Ltd (ASX: YBR) and G8 Education Ltd (ASX: GEM), as well as data analytics business Veda Group Ltd (ASX: VED).
Alternatively, The Motley Fool's top advisors have also uncovered another small-cap stock with fantastic growth potential which is well worth checking out.
