The stock market can be a rewarding place for investors who play their cards right. For example, in 2020, Scottish Mortgage Investment Trust soared over 106%, doubling early investors’ funds. Tesla is another growth story, as it soared over 700% in 2020.
However, stock market returns don’t always have to be this flashy. In fact, a mere 8% per year gain, with dividends reinvested, compounded over 30 years, can leave investors with a healthy figure. At 21 years old, this is a strategy I am currently employing to build wealth for later in life. Let’s take a closer look at three key ways I plan to do this.
Compound interest and high dividends
So, where did I start? I currently invest a minimum of £200 per month into a Stocks and Shares ISA. I also invest in index funds, which mimic indexes like the FTSE 100 or S&P 500. Over the past 30 years, with dividends reinvested, these indexes have averaged returns of 7% and 10%, respectively. If I had started investing in the FTSE 100 with £1,000 to start and a £200 per month top-up 30 years ago – granted I wasn’t born yet – my investment would be worth over £250,000 today. Using the S&P 500’s healthier returns, I would have made over £470,000 from the same 30-year period of investing.
Another tactic I could use would be to focus on building a high-yielding dividend portfolio and reinvesting the cash generated. If my portfolio was generating 8% a year, with a 5% dividend reinvested, then my £1,000 would be worth over £920,000 when I was 50. Using this passive income hack is another way I can build a healthy retirement fund by benefitting from compounding.
The key strategy here is to drip feed small amounts regularly. This investment style isn’t about generating big returns straight away, so there is no need to dump thousands into my portfolio at the start. This also helps to ease the pressure on my personal finances.
By investing small but consistent amounts, I also benefit from a phenomenon called dollar-cost averaging (or pound cost averaging in my case). Dollar-cost averaging works by investing fixed amounts consistently and benefitting from the overall upward trend of an asset, regardless of the price of each entry. This helps develop financial discipline as well as reduce the stress of investing.
Focussing on quality
The final way that I am looking to build a strong retirement fund is by making high-quality, long-term investment decisions. Whether this entails investing in index funds or choosing individual high dividend companies, I am going to take the long-term outlook. That is, investing in stable growth companies with a 30-year outlook, as opposed to high-growth stocks that could give me a quick return now.
Overall, by investing small amounts regularly, into index funds and high-quality dividend stocks, I think I can build myself a comfortable retirement fund over the next 30 years. There are always risks in investing in the stock market, but by taking this slow growth, consistent approach, I think I can make my money work in my favour for the future.
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Dylan Hood has no position in any of the shares mentioned. The Motley Fool UK has recommended Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.