Ask any financial expert, and they’ll tell you that stocks are key to building long-term wealth. While stocks can grow exponentially over time, their short-term movements are unpredictable. The recent volatility of the ASX is a prime example.
So, how can you make money from stocks?
It’s simpler than you might think—just follow proven practices and practice patience. A common mantra among long-term investors is: “Time in the market beats timing the market.”
This phrase highlights the effectiveness of a buy-and-hold strategy, where you hold onto stocks for the long term rather than frequently trading. Investors who trade regularly often miss out on strong returns and lose money to transaction costs.
For instance, the S&P/ASX 200 Index delivered an average annual return of 9.3% over 10 years (as of 2021). However, frequent traders risk missing out on the market’s best days, significantly reducing their returns. The problem is, it’s impossible to predict when those high-performing days will occur. This unpredictability makes staying invested long-term crucial to capturing the market’s best moments.
In addition to a buy-and-hold strategy, diversification is another time-tested practice to reduce risk and boost potential returns. Instead of focusing on just individual stocks, experts recommend spreading investments across stock funds like managed funds or ETFs. These funds offer exposure to a broad range of stocks, making diversification easier and more affordable.
While some investors may aim for the next big stock like Google or Amazon, most professionals struggle to predict which companies will deliver outsized returns. This is why experts advise investing in funds that track major indices like the ASX200, allowing you to benefit from the market’s average annual returns of around 10% without the guesswork.
By adopting a long-term mindset and diversifying your portfolio, you can harness the power of the stock market and grow your wealth over time.
