The sharemarket is often thought to be a very complex system for making money. All too often, investors assume that those making a fortune are the ones buying and selling stocks on a daily basis – playing the trends and attempting to ‘time the market’. But the secret is, it’s actually quite the opposite. That’s right, more often than not, the best way to recognise riches in the stockmarket is by buying quality companies and then doing absolutely nothing (except maybe buying more over time). It might not seem like the most exciting way to invest, but truth be…
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The sharemarket is often thought to be a very complex system for making money.
All too often, investors assume that those making a fortune are the ones buying and selling stocks on a daily basis – playing the trends and attempting to ‘time the market’.
But the secret is, it’s actually quite the opposite.
That’s right, more often than not, the best way to recognise riches in the stockmarket is by buying quality companies and then doing absolutely nothing (except maybe buying more over time).
It might not seem like the most exciting way to invest, but truth be told, it is by far the most effective.
And there’s a very good reason why that is the case, and that reason is compound interest.
In fact, so great is the phenomenon of compound interest that Albert Einstein once referred to it as the “eighth wonder of the world”.
To gain that kind of appraisal from Einstein, you know it has to be good…
Compound interest is a function understood by most people with a simple mathematical background (or indeed, by most people who have ever taken out a loan), and yet its true potential is often completely underestimated.
In the short term, it might not seem like that powerful a tool, but the key to making it work is patience. The real gains are made in the long term.
Indeed, that is where Warren Buffett has made his fortune…
Motley Fool Columnist Morgan Housel recently highlighted that Buffett, who is arguably the greatest investor this world has ever seen, has accrued $62.7 billion of his $63 billion treasure chest since he was 50 years old.
Even more incredibly, $60 billion has been made since his 60th birthday…
Take a look at this…
If you had have invested $10,000 one year ago and achieved the market’s 12% annual average return…
Today, your portfolio would be worth $11,200 – a total gain of $1,200.
But now imagine that you achieved that same 12% return over the next year… Your portfolio would now be worth $12,544. That’s a total gain of $1,344 for the second year.
You can see that the gains are starting to pick up in pace… That’s because the money you earned in the first year is now also hard at work to make you more money.
After 20 years you’d be sitting on a portfolio worth more than $96,000 while you would have just shy of $300,000 after 30 years.
Take a look at this chart. That tiny purple patch down the bottom of each year represents the $10,000 you initially invested. The remaining pink sections resemble the total interest earned over the years.
Source: Money Smart
In that 30th year, a total of $32,100 would have been earned… Not bad considering the main thing you’re required to do is sit on your hands and let the money do all the hard work…
And believe me, there are plenty of ways to make those gains even more spectacular.
For instance, if you were to make regular deposits into your portfolio you could fast-track your way to making your first million on the market.
There are also plenty of stocks which have strong potential for beating the market’s average returns over the coming years.
I’m talking about companies like Coca-Cola Amatil Ltd (ASX: CCL), Veda Group Ltd (ASX: VED), Telstra Corporation Ltd (ASX: TLS) and Cash Converters International Ltd (ASX: CCV) – three of which I own.
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Motley Fool contributor Ryan Newman owns shares in Coca-Cola Amatil Ltd, Veda Group and Cash Converters International.