Investing in the Stock Market? 3 Steps to Double Your Money
The investing world is full of empty promises, and there are plenty of investments that guarantee to make you a lot of money essentially overnight. Generally, though, if it seems too good to be true, it probably is.
However, with the right strategy, investing in the stock market can be a fantastic way to generate long-term wealth -- and you don't need to invest a lot of money to reap the rewards. While investing isn't a "get rich quick" tactic, there are a few easy (and legitimate) ways to double your money with next to no effort.
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1. Take advantage of passive investments
One of the easiest ways to make money in the stock market is to invest in passive investments like index funds or exchange-traded funds (ETFs). While actively managed funds have a professional choosing the stocks within the fund, passive funds track certain stock market indexes, like the S&P 500 or the Dow Jones Industrial Average, and attempt to mirror their performance.
In other words, by investing in, say, an S&P 500 ETF, you'll instantly be investing in all the stocks that make up the S&P 500 index. The S&P 500 includes stocks from 500 of the largest companies in the U.S., and you can gain exposure to all of them with a single investment.
While it may seem counterintuitive, passive funds like index funds and ETFs tend to outperform actively managed mutual funds. In fact, between 2010 and 2020, only 24% of actively managed funds managed to outperform their passive counterparts, according to research from Morningstar.
With passive investments, not only is it easy to invest in some of the world's strongest companies, but your money is more likely to grow faster, too.
2. Don't try to time the market
One of the most daunting aspects of investing in the stock market is figuring out what to do during market downturns. When the market starts to take a turn for the worse, it can be tempting to sell your investments and withdraw all your money.
However, selling your investments during periods of volatility can be a major risk because it involves trying to time the market. When you time the market, you're trying to sell your stocks just before prices begin to fall, then reinvest when prices are at rock bottom.
While this sounds like a smart strategy, it's nearly impossible to pull off. The stock market is unpredictable, and nobody knows exactly when market downturns will occur or how long they'll last. If you sell or buy at the wrong time, you could end up losing money.
You're better off, then, holding your investments through periods of volatility. Keep in mind that you won't actually lose money unless you sell your stocks. Even if the market does crash, as long as you don't sell, there's a good chance your investments will rebound eventually and you won't lose any money.
3. Leave your money alone
It takes time for your money to grow. To earn as much as possible, it's best to leave your investments alone for several years or, ideally, decades.
The longer you let your money grow, the more you can potentially earn. Compound interest helps your savings grow exponentially the more time they have to accumulate, similar to a snowball rolling down a hill. It will take time for the snowball to gain speed, but after a while, it will start getting bigger and rolling faster down the hill. The longer it rolls down that hill, the larger it will become and the quicker it will grow.
Putting it all together
By taking advantage of all three of these strategies, you can easily double your money.
Say, for instance, you're investing in an S&P 500 ETF and earning a modest 7% average annual return on your investments -- which is just below the market's long-term average. If you invested $1,000 right now and made no additional contributions, you'd double your money within around 10 years.
However, let's say that in addition to your initial $1,000 investment, you continue investing $100 per month, all other factors remaining the same. In this scenario, you'd reach $2,000 in less than one year. After 10 years, you'd have more than $18,500. In 30 years, you'd accumulate around $121,000.
Investing in the stock market can be intimidating, but it doesn't have to be. With the right strategy in place, you can easily double your money and build wealth that lasts a lifetime.
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