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While investing in cryptocurrencies or meme stocks can be exciting, it can be a risky strategy.
These investments can provide the opportunity to get rich quick, but experts say it’s often the more boring strategies that pay off in the long run.
Playing it safe and sticking to the basics may be the best way to build wealth over time. Money.com reported.
In fact, combining three boring but highly effective strategies can make you a millionaire in 30 years, with an investment of just $500 a month.
Here’s the details. In short, stick to sensible S&P 500-linked funds, invest the same amount each month, and don’t try to time when to buy and sell, but instead use the magic of compound interest.
Following three boring investment strategies could make you a millionaire and buy you a boat
Index funds
The first strategy is to invest in index funds, according to Money.com.
While picking stocks can be fun, timing the market is exceptionally challenging, even for experts.
In the first half of 2024, 81.8 percent of actively managed funds failed to outperform the S&P 500 index, according to Morningstar research analysis. The Wall Street Journal.
Over the past decade, nearly 73 percent failed to beat the index, the outlet found.
Over the past 30 years, the S&P 500 has had an average annual return of 10.52 percent.
“When you pick stocks, you’re demonstrating confidence that you somehow know that the rest of the market didn’t influence the price of an investment,” Brenton Harrison, a financial advisor and founder of advisory firm New Money, New Problems, told Money.com.
Investing in index funds, on the other hand, means you don’t have to choose.
An index fund is a mutual fund that tracks the performance of a market index, such as the S&P 500 or Nasdaq Composite, by holding the same stocks or a representative sample of them.
“These funds allow you to spread out your investments, increasing the chances that if one sector of the index struggles, another will hold up,” Money.com said.
“That’s the power of diversification, that index fund investing provides all in one place.”
Dollar cost averaging
Another strategy is called “dollar cost averaging.”
While this may seem complicated, you are already using this strategy to build long-term wealth if you contribute to a 401(K) retirement plan at work.
Dollar-cost averaging involves investing a certain amount of money at regular intervals, regardless of what is happening in the market at any given time.
The ideal investment strategy is to buy when prices are low and sell when they are high.
But again, timing the market is extremely difficult and risky.
Instead, investing at regular intervals eliminates some of that risk.
Morningstar’s analysis last year showed that over 21 years, buy-and-hold portfolios outperformed market-timing portfolios by 10 percent.
“Dollar-cost averaging is one of the best financial tools a person can use because it eliminates human error from the investment process,” Harrison said.
“Rather than feeling like you have the ability (which we don’t) to time the market, it gives you the best opportunity to get the best value for your investment.”
Compound interest
Taking advantage of compound interest is also the key to building wealth.
Simply put, compound interest is interest earned on interest.
For example, if you invest $100 and earn 5 percent interest each year, you’ll have $105 at the end of the first year. This larger sum will then earn 5 percent interest, bringing the total to $110.25 at the end of the second year.
Over the years, this will continue to snowball at an ever-increasing rate as you earn interest on an ever-increasing account balance.
One way to take advantage of this compounding is to set up a dividend reinvestment plan, according to Money.com.
Abbreviated as DRIP, this involves automatically reinvesting any dividends you receive from stocks or funds you own.
“Dividend reinvestment is an easy way to have something that builds on itself,” Harrison said, since a DRIP means you’re increasing how strongly your account is growing.
Private jets will be a great way to spend your money if you become a millionaire.
For example, a $100,000 investment made in 1990 in a fund that tracks the S&P 500 would have grown to more than $2.1 million by the end of 2022 if dividends had been reinvested, according to Charles Schwab.
If dividend reinvestment is removed, the same investment would have grown to only $1.1 million, or just over half that amount, according to the financial services firm.
Three boring strategies combined
When combined, these three strategies are capable of producing eye-catching results, Money.com said.
Let’s say you invest $500 each month in an index fund with a 10 percent compound annual growth rate, and that fund pays a quarterly dividend.
In 30 years, you will have accumulated more than a million dollars, according to a calculator provided by the U.S. Securities and Exchange Commission.