The share market is a great place to invest your money, provided you have a long-term mindset.
Below, I'll prove it to you.
But first, consider this quote from Albert Einstein, "Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn't… pays it."
By taking a 'big picture' approach to investing and being confident in your own ability to analyse and hold publicly-listed companies, the share market can be a powerful tool in building up your retirement nest egg.
What's more, Australian investors have advantages which few of our international counterparts are afforded. For example, we can invest through our self-managed superannuation funds (SMSF) for a discounted tax rate and, perhaps more importantly, we get franking credits on dividends.
That is, a discount on our personal tax returns when we report our income. Although it may not seem like it, together, these make a massive difference to what ordinary investors can achieve in the stock market.
But how can you double your money in just 10 years? The answer: compounding returns.
Source: Moneysmart.gov.au. Click to enlarge.
For an investor to double their money in a decade, an average annual return of just 7.2% is needed.
Hypothetically, let's take a well-known example such as Coca-Cola Amatil Ltd (ASX: CCL) ("CCA") so we can see just how simple it is to double an investment portfolio in 10 years.
The stock currently trades around $9.35 per share.
Since CCA is forecast to pay a 4.4% partially franked dividend in the next 12 months, it means the share price needs to increase just 2.8% per annum to make up the required rate of return, of 7.2%.
Therefore, if CCA shares reach just $12.32 in a decade (I think there's a pretty good chance they will), your money would have doubled – assuming it continued to pay out its current dividend yield for each of the next 10 years, and you reinvested the dividends back into the company.
Let's take another, more practical, example and assume you have $20,000 to invest today. But instead of putting it all in one dividend stock (after all, for risk management, it's probably a good idea to diversify) you buy growth stocks.
Then you add $1,000 per month to your portfolio rain, hail or shine and achieve a rate of return equal to 11.7% pa – the markets average return over the past 30 years.
In just 10 years, your portfolio will be worth a staggering $268,027!
Source: Moneysmart.gov.au. Click to enlarge.
If you're sitting back in awe of these numbers, remember its nothing new, and long-term investors have been buying and holding stocks for longer than we've been alive. However there are risks and I'm certainly not telling you to go out and buy the first stock you see – probably Commonwealth Bank of Australia (ASX: CBA) or Wesfarmers Limited (ASX: WES) – because I think you're unlikely to succeed at achieving 11.7% pa with such an investment strategy.
However, by following the guidance of seasoned, like-minded, long-term investors there is a chance you could more than double your money in the next 10 years. For example our top investment advisor, Scott Phillips, has an excellent record for picking market beating returns!
