Investing in the stock market is the best way to grow your wealth over time. Although it carries a higher level of risk than other investment classes such as bonds or term deposits, there is also the potential for life-changing profits.
In fact, a recent report by Dr Shane Oliver of AMP Limited highlighted just how powerful share market returns can actually be. According to his research, cash has appreciated at an average rate of 4.8% p.a. since 1900 while bonds have jumped 6% p.a. in the same time. That means that $1 invested in either asset class 114 years ago would be worth $216 or $750 today, respectively.
Now the exciting part…
The Australian share market, on the other hand, has jumped at an average rate of 11.9% since 1900. That's even through both World Wars, the Great Depression, the Dotcom crash and the more recent Global Financial Crisis. Although 11.9% p.a. might not sound that exciting to begin with, over 114 years it can have a profound effect. In fact, that same single dollar invested back in 1900 would be worth a stunning $408,181 today.
Okay, so I get that we don't all have 114 years up our sleeves to realise those sort of returns, but you get the picture – the stock market can be a truly wonderful way to grow your wealth over the years.
Making your fortune
While it is certainly possible, achieving the market's average 12% return on a consistent basis can be an extremely difficult task to achieve. The great news is, you don't need to aim that high to make money on the market.
Let's run with a much more achievable annual return of 8% for a moment. Say you had $20,000 to invest today and committed to depositing a further $50 into your portfolio every week. Over the next 40 years, at 8% per year, your initial $20,000 (plus the regular deposits) will have turned into a stunning $1,108,037. That's right — you'd be holding more than $1 million.
Picking the right stocks
Of course, to achieve even 8% per annum you still need to be able to pick the right stocks for the job. While most people would think to buy well-known companies like Woolworths Limited (ASX: WOW) or Westpac Banking Corp (ASX: WBC), I don't think they're great value at today's prices.
Instead, I think investors ought to look at stocks which offer stronger growth potential. For example, I recently acquired shares in data analytics business Veda Group Ltd (ASX: VED) while I also think Cover-More Group Ltd (ASX: CVO) and G8 Education Ltd (ASX: GEM) are attractive buys right now.
