When bank savings accounts are bragging about 0.4% interest rates and 10-year Treasury bonds are yielding 1.6%, it can be hard to figure out how best to grow your money. The answer for most of is simple: the stock market.
Stocks have long outperformed alternatives over many decades, and the stock market can deliver almost magical growth, if you know what you're doing.
Check out the table below, featuring data from Wharton Business School professor Jeremy Siegel, who calculated the average returns for stocks, bonds, bills, gold, and the dollar, between 1802 and 2012:
Annualized Nominal Return
1. Be a long-term investor
A first strategy to pursue magical financial growth is to be a long-term investor. Here's how your money can grow over long periods at an 8% return -- though over your particular investing period, you might average significantly more or less than 8%:
Growing at 8% for:
$5,000 Invested Annually
$10,000 Invested Annually
$15,000 Invested Annually
With enough time, you can achieve millionairehood or even multi-millionairehood -- and, of course, the more you can invest each year, the faster you'll get there.
2. Use index funds
Index funds are arguably the best way to grow your money at roughly the same rate as the overall stock market. There are many index funds out there, so look for low-fee index funds and focus on ones that track broad-market indexes such as the S&P 500, which features about 500 of America's biggest companies.
There are many others you might consider (or might find available in your employer's 401(k) plan), but here are three great index funds, which you might invest in through a 401(k), an IRA, or a regular, taxable brokerage account:
- SPDR S&P 500 ETF (NYSEMKT: SPY)
- Vanguard Total Stock Market ETF (NYSEMKT: VTI)
- Vanguard Total World Stock ETF (NYSEMKT: VT)
Respectively, they'll have you instantly invested in 80% of the U.S. stock market, the entire U.S. market, or just about all of the world's stock market. There are plenty of other good, low-cost index funds, some of which target bonds and other segments of the market.
3. Favor optionality
If you want to aim higher than the market's average return, you'll likely want to add some carefully chosen individual stocks to your portfolio. You might look for growth stocks, and you'd do well to consider The Motley Fool's investing philosophy, which recommends buying 25 or more stocks and aiming to hold them for at least five years. That will give even overvalued stocks a decent chance to grow into -- and beyond -- their intrinsic values, and will give you a greater chance of having some companies that turn into phenomenal long-term performers among your holdings.
As you read up on and learn about many companies and decide which ones you want to invest in, consider looking for optionality. A company has optionality if it is able to move in new directions as it pursues growth. It might not move in some or all of those directions, but it could. It has the option to, should it want to.
Here are some examples of companies with optionality:
- Netflix (NASDAQ: NFLX) has demonstrated attention to optionality by suggesting that it might expand into games. It might also drive new revenue by adding advertising to its offerings.
- Apple (NASDAQ: AAPL) has demonstrated optionality in its ability to expand its ecosystem to include, say, watches. Its devices, over time, have added more and more features and can add even more -- such as health monitoring.
- Amazon.com (NASDAQ: AMZN) has demonstrated optionality when it expanded from selling just books to selling other things -- and later, to letting other businesses sell things on its platform.
It's helpful to ask yourself as you study a company whether it is able move in new directions as it strives to fulfill its mission and meet its goals. Companies that are limited in what they can do may offer less magical performances.
These are just three approaches to having your portfolio experience magical growth. See which ones are a good fit for you and your goals.
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John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool's board of directors. Selena Maranjian owns shares of Amazon, Apple, and Netflix. The Motley Fool owns shares of and recommends Amazon, Apple, Netflix, and Vanguard Total Stock Market ETF. The Motley Fool recommends the following options: long January 2022 $1,920 calls on Amazon, long March 2023 $120 calls on Apple, short January 2022 $1,940 calls on Amazon, and short March 2023 $130 calls on Apple. The Motley Fool has a disclosure policy.