Did anyone panic when they saw the market downturn on Monday? I know I received quite a few panicked texts throughout the day. A lot of people frantically checked their investment balances and let worry set in. I didn’t even check my balances. When it comes to long-term investing, small corrections and market dips really don’t matter.
Building wealth and financial security is at the forefront of many people’s lives. There are a number of strategies to build net worth over your lifetime, but what I’ve realized is that the most effective strategies take time.
The value of time may be the single most powerful tool in building a healthy investment balance and attaining financial independence.
How many of you have had a friend or colleague explain some new strategy to make money fast; like a multi-level marketing scheme or a new cutting edge stock that was guaranteed to have triple digit returns? I can’t count the number of times that I’ve carried on these conversations, and in each case, the money making endeavor never seems to come to fruition.
When I first started my path to financial independence and began investing in the market, I quickly realized that investing for short-term gains is a losing proposition. I was confident that I’d be an incredible stock picker. But what I found out is that pursuing wealth with a short-term mindset will have the unintended effect of ruining your rate of return and your ability to build net worth. This is exactly why I invest in index funds for my retirement accounts.
I think Warren Buffet said it best when he stated, “if you aren’t willing to own a stock for ten years, don’t even think about owning it for ten minutes. Put together a portfolio of companies whose aggregate earnings march upward over the years, and so also will the portfolio’s market value.”
I eventually wizened up and began investing my portfolio in low cost index funds. Or at the very least, in blue chip large cap companies that I believed would provide value over the long-term. In doing so, I’ve seen substantial gains in our retirement portfolios (Roth IRAs & 401-K’s) as well as our taxable investment accounts.
There are so many people out there that are completely afraid of investing in the stock market. But how many millionaires do you know have amassed their net worth by investing in CD’s or savings accounts?
Despite the volatility and market swings that you will undoubtedly experience, the stock market is one of the only investment vehicles to build significant net worth during our lifetime. The key is avoiding a short-term mindset.
The market will go up and the market will go down. But over the long-term, the market has always generated positive returns. In fact, the S&P 500 has returned approximately 10% average annual returns since its inception!
A financial plan with a long time horizon will have a much better chance of achieving your financial goals. The power of compound returns is profound. If you started saving $100 a month at age 40 with a 7% annual return, you’d end up with $49,195 by the time you turn 60! If instead you decided to start saving $100 per month at age 25, you’d end up with $165,884 at age 60. That’s a 237% increase in your nest egg by saving over the long-term!
In the end, net worth is a long-term game. It’s not about realizing great returns month to month or year to year. It’s about prudently investing in a diversified portfolio over the course of 20, 30 or 40 years. No matter what your income level, everyone can accumulate a substantial net worth by leveraging the most powerful tool in all of finance… time.
photo cred: Tax Credits