Here's a secret. Doubling your money in the stock market isn't difficult. In fact, even if you had bought shares of an S&P 500 index fund at the worst possible point in the past 20 years -- in 2007 just before the financial crisis hit -- you would have nearly tripled your money in the years since.
Having said that, if your goal is to double your money in the stock market, there are some best practices to follow, as well as some blunders to avoid. With that in mind, here are three "tricks" to keep in mind that will put you in the best position to double your money and much more in the years to come.
Here's one big mistake newer investors often make. It may seem like investing in risky stocks with the highest growth potential or speculating on stock options is the best way to get rich in the stock market. And while these methods have the highest possible returns, the most likely outcome isn't making a bundle of money - it's the exact opposite.
The best course of action is to learn some of the basics of how to use value investing and growth investing principles the right way. To make a long story short, you should aim to buy rock-solid companies with long-tailed growth potential. And if you don't want to do the homework involved with choosing individual stocks, there's nothing wrong with buying index funds. You might be surprised at the returns that have been made over the years with seemingly boring investments like Coca-Cola (NYSE: KO), American Express (NYSE: AXP), and Johnson & Johnson (NYSE: JNJ) – even the Vanguard S&P 500 ETF (NYSEMKT: VOO) index fund has delivered 287% total returns over the past decade .
Over the past 20 years (through 2019), the S&P 500 has generated annualized returns of just over 6%. Meanwhile, the average equity fund investor has achieved returns of just 4.3% per year, according to Dalbar's latest Quantitative Analysis of Investor Behavior (QAIB). This is the difference in turning a $100,000 investment portfolio into about $230,000 or $322,000 over those two decades.
Some of this difference has to do with investment fees, but the biggest reason for the difference is over-trading. Humans are emotional beings. When stocks are soaring, we see everyone else making money and push all of our chips into the middle. Conversely, when the stock market is crashing, it's human nature to want to "get out before things get worse." It is common knowledge that the central goal of investing is to buy low and sell high. But our instincts compel us to do the exact opposite.
The point is that trying to time the market when it comes to buying or selling is a losing battle. There are certainly some good reasons to sell, and I sell stocks every so often. But buying or selling stocks simply based on what the overall stock market is doing isn't a winning long-term strategy. If you're worried the market is too expensive, dollar-cost averaging is a strategy to try. And if the market is crashing, think of it as a good time to add shares of excellent companies for the long term.
It's certainly possible to double your money in the stock market over short periods of time. Just ask anyone who has invested in big tech stocks over the past few years. And if it happens, great. But don't swing for the fences in an attempt to get rich quickly.
The hands-down best way to build wealth in the stock market is to invest in great companies and hold onto them for as long as they remain great companies. Don't sell stocks just because their price went up or down. And approach every investment as if you were buying a business, not a stock. You wouldn't start or buy a business to run for a few days or weeks and then cash out, right? The same logic should apply to your stock investments.
No extraordinary measures needed
As billionaire investor Warren Buffett has said, you don't have to do extraordinary things to get extraordinary results. And Buffett has built a fortune of nearly $100 billion without speculating on risky investments, without constantly buying or selling stocks, and by simply letting the power of time do the heavy lifting. By keeping these three things in mind as you go about your investing career, you may not build a billion-dollar portfolio, but you can certainly multiply your investment dollars several times over.
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Matthew Frankel, CFP owns shares of American Express. The Motley Fool owns shares of Vanguard S&P 500 ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.