Most people are looking for a quick get rich scheme that will make them rich quickly without putting in any effort. Let me tell you something, that does not exist – unless you have a truly revolutionary business idea. For those that lack any creative flair, don’t worry, you still can get rich but it will just take a little longer.
In order to get rich slowly and without putting in much effort, start investing in the stock market. Yes, with this you will need a bit of money to start of with but on the flip side, it does not require any of your time if you buy into the rights shares/funds. The stock market will not make you an overnight millionaire but it will make you rich in the long-term.
History has shown us that the average stock market grows by about 4% – 8% a year. An 8% gain on an investment of £5000 may not seem like much, but 8% year after year on an ever-rising base of assets starts to really sizzle. And this is due to the power of compounding. Through the power of compounding, you will be able to grow your wealth and get rich in the long-run.
Let’s look at an example:
Let’s say that you invest £5000 in the stock market. And let’s be modest and say that the yield on this is 6% annually. So after 1 year, your money will have grown to £5300. And the great thing about compounding returns is that your money will now grow at a rate of 6% on the £5300 and not the original £5000 mean your return will be getting bigger and bigger after every year. After 10 years, your initial £5000 will be worth £8447, after 20 years £15,127, after 30 years it will be £27 091, after 40 years it will be 48,517 and after 50 years it will be £86,887. You can just see how much your money has grown by in the long-term
Now lets take this a bit further and more into reality.
In this example we assume you are 40 years old.
Let’s say you set aside £5000 this year. In addition to the 6% gain (£300) you achieve this year, you put in another £5000 in the second year and each year after that for the next 15 years. So after 15 years, you will have invested a total of £75,000. And with the power of compounding, you will almost have doubled your money as it will now be worth £116,379.
Lets say you put no more into the fund and you take out nothing till you are about 70. When you are 70, the value of your investments will be worth £373,245. And when you have reached this amount, your yearly gains alone will amount to £22,394 — far higher than the £5,000 you put in each year for 15 years.
Now you might be thinking to yourself that whilst all this sounds good, what about inflation? Inflation will not be a problem as stocks and shares tend to appreciate faster than inflation over an extended period. And having a good mix of bonds and equities (stocks and shares) will help alleviate the inflation problem. When inflation is high, like in the 70s, investors flock towards high payout bonds. When inflation is low like it is at the moment, stocks tend to hold greater appeal. So although not much work is needed, you will need to re-balance your portfolio at least once a year to ensure you have the correct balance between equities and bonds.
It is important to remember that the power of compounding only works if you have a long-term horizon. Initially, the gains may seem unimpressive but as time goes on, compounding will have had a drastic effect on your portfolio and will help you grow rich.
Many articles online give advice like what I have given above but don’t show you how to actually implement that advice. Here, I will aim to briefly state how you go about achieving the above mentioned advice:
1) Open an account with a low-cost platform – There are many different platforms out there and the level of fees can be highly varied. If you want to achieve the biggest gains in the long-term, use the least costly platform out there.
- For anyone who portfolio is worth £100,000 or less, the least costly platform is Charles Stanley Direct
- For anyone whose portfolio is worth more than £100,000, the least costly platform to use is AJ Bell Youinvest.
2) Buy tracker funds – Tracker funds are low cost and you are to diversify your portfolio in an instant. Even with tracker funds, different tracker providers provide different charges so here are the least costly.
- Vanguard FTSE UK All Share Index Trust (VVFUSI) – Tracks the FTSE 100 index
- iShares MSCI UK Small Cap (CUKS)
- Fidelity Index World Fund I (GB00B7LWFW05) OCF – World equity
- Vanguard FTSE All World High Dividend Yield ETF – World dividend paying
- iShares MSCI World Minimum Volatility ETF – low volatility
- BlackRock Global Property Securities Equity Tracker D (GB00B5BFJG71) – Property Global
- Lyxor ETF Commodities Thomson Reuters/Jefferies CRB TR (CRBL) – Commodities
- Vanguard Japan Stock Index- Japanese stock exchange
- DB X-Trackers DAX UCITS ETF – German Stock Exchange
- Vanguard S&P 500 ETF
You will need to buy a mix of these trackers to ensure you benefit from true global diversification
3) When investing, don’t try and time the market -Rather than timing the market, it is a better idea to use Dollar Cost Averaging. Dollar cost averaging is putting a set amount of money into your investment vehicle at a determined frequency, say £300 per month. This type of strategy is good during all market conditions. In down markets you’re able to buy more shares and in up markets you’re adding fewer shares to ones already producing capital gains. The benefit of dollar cost averaging is that it takes the pain out of deciding how much you can afford each time you put money into the market.
The trick with getting rich in the long-term is just to buy trackers and hold them for the long-term. Actively trading by continually buying and selling different shares will eat away at your gains as you will be paying high brokerage fees. And besides, it has been proven that a buy and hold strategy gives an average investor higher returns in the long run than those who trade actively.