The share market is a great place to invest your money, provided you have a long-term mindset.
I'll prove it to you…
But first, consider this quote from Albert Einstein, "Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn't… pays it."
By taking this 'big picture' approach to investing and being confident in your own ability to analyse and hold publicly-listed companies, the share market can be a powerful tool in building up your retirement nest egg.
Indeed Australian investors have added advantages which few of our international counterparts are afforded.
For example, we can invest through our self-managed superannuation funds (SMSF) for a discounted tax rate and we get franking credits on dividends!
Franking credits can give us a discount on our personal tax returns when we report our income to the Australian Tax Office.
Although it may not seem like it, together, these little benefits can make a massive difference to what ordinary investors can achieve in the stock market.
But how can you double your money in just 10 years? The answer: compounding returns.
Source: Money Smart
For an investor to double their money in a decade, an average annual return of just 7.2% is needed.
Hypothetically, let's take the well-known stock, Coca-Cola Amatil Ltd (ASX: CCL), to see just how simple it is to double an investment portfolio in 10 years.
The stock currently trades around $10.98 per share.
Since Coca-Cola Amatil is forecast to pay a 3.9% partially franked dividend in the next 12 months, it means the share price need increase just 3.3% per annum to make up the required rate of return of 7.2%.
Let's take another example and assume you have $20,000 to invest for the next 20 years. But instead of putting it all in one dividend stock (after all, it's probably a good idea to diversify), you buy a portfolio of growth stocks.
Then you add $1,000 per month to your portfolio rain, hail or shine and achieve a rate of return equal to 11.7% per year – the market's average return over the past 30 years.
In just 20 years, your portfolio will be worth a staggering $1,017,974!
Source: Money Smart
If you're sitting back in awe of these numbers just remember this is nothing new and savvy long-term investors have been buying and holding quality stocks for many years.
However, remember, there are risks to this strategy and I'm certainly not telling you to go out and buy the first stock you see – probably Commonwealth Bank of Australia (ASX: CBA) or Wesfarmers Ltd (ASX: WES) – because I think you're unlikely to achieve a return of 11.7% per year with such an investment strategy.
But by following the guidance of seasoned, like-minded long-term investors there is a genuine chance you could more than double your money in the next 10 years.
Our #1 stock pick of 2015 – Your FREE!
