The number one factor for building wealth in the stock market is time in the market. The longer your investing horizon, the more you stand to make.
You can be a great investor and earn 15% annual returns and quadruple your money in 10 years. Or you can be an average investor and earn 7% annual returns and quadruple your money in about 21 years. Before you start getting delusions of grandeur, there are only a handful of people that can boast of 15% annual returns over their investing lifetimes.
Compounded interest is the most powerful force in the universe. — Albert Einstein
Time and patience are two sure-fire ways to build wealth. Basic economic principles like the time-value of money and compounding make it so the deck is ever stacked in your favor, as long as you continue to earn interest.
Time is the friend of the wonderful company, the enemy of the mediocre. — Warren Buffett
Great companies will do well over time. They will build their brands and grow their earnings. Your main job in owning them is to review their financial statements every year or so and, assuming there are no glaring red flags, stay out of your own way and let them work for you.
The important part is identifying the wonderful companies. Companies that have survived and thrived through economic downturns, recessions, and changing business conditions for example. A good place to start is to look for companies that have a proven track record of growing dividends. 20 consecutive years of increases is preferable. DRIP Investing is a good website that tracks and categorizes dividend paying companies, including how many years of consecutive raises a company has.
Once you have your wonderful company identified, don’t second guess yourself just because the stock price doesn’t go up right away. Stock price declines should not phase you. They give you a chance to accumulate more shares for less money — it’s the same concept as getting a discount at the store. The best part about discount shopping for income stocks is not only do you get more shares for less, you lock in a higher yield as well.
PepsiCo will likely pay close to $4 per share in dividends next year. If you can acquire shares at $100, you are locking in a 4% yield on the cost of your investment. If on the other hand shares go up to $135, you are only looking at a 3% yield.
When you are buying stocks for the long term, the starting price still matters, but it matters a little less. Time is still your friend, but by overpaying when buying, you can knock off the equivalent of a year or two of returns. Not a huge deal when your time frame is 20+ years, as the compounded power of growth of great companies will help you catch up — but why start the race behind?