Unlocking Wealth: The Secret Strategy for Long-Term Investment Success

If you have been following these posts, you should understand the foundation needed to start building wealth. If not, you might want to check out "Should I Start Investing". With a solid foundation, you can begin to invest in opportunities that will generate passive income with minimal effort. Primarily, I'm referring to investing in the stock market.

Historical Returns: A Look Back
There are several investment options available, but the stock market is one of the most lucrative. Looking at the market historically, it has averaged nearly 10% over the past 30 years. For instance, the S&P 500 was priced around $460 in September 1993, which means its current price is roughly 10 times higher. Thanks to compounding interest, gains accumulate exponentially, not linearly.

We'll delve deeper into compounding in a future post, but the essence is that the extra earnings are reinvested, leading to growth that resembles a snowball effect.

Understanding Market Risks
However, there are inherent risks with investments, such as market crashes. It's especially challenging when you become emotionally attached to your investments. Many individuals withdraw their money from the market when they see losses, losing faith in the system. Consider this: if I had invested in the S&P 500 at its peak before the 2008 Great Recession, how much would I have lost? Surprisingly, I would have seen around 300% returns (non-annualized) if I held onto those investments until September 2023.

Patience: The Investor's Best Friend
It's wise to be patient, possibly waiting around 10 years for substantial returns. This is particularly true if you invest right before a market downturn. Withdrawing your investments immediately after a crash could mean losing nearly half your capital.

Meme Stocks: Investment or Gambling?
Lately, meme stocks have been trending, with a select few making significant profits. Yet, many more have risked excessively and incurred substantial losses. I've even heard some individuals claim they'd never invest again. Here's a reality check: betting on these meme stocks isn't investing; it's closer to gambling.

The Broader Market Approach
Some might find it counterintuitive that I view the seemingly volatile stock market as a near "sure thing." My reasoning is based on certain assumptions. If I invest in an ETF that tracks a market cap-weighted index, like VOO or VTI, I'm essentially investing in the broader market. The underlying bet is that American companies will be more productive a decade from now, propelled by technological advancements.

Warren Buffet's Timeless Wisdom
Warren Buffet has endorsed this strategy for years. A safer bet might be to diversify further with an international index fund, essentially wagering that global productivity will rise over the next decade – a presumption I consider quite safe.

In Conclusion
The strategy is straightforward: invest in a broad market index fund and practice patience. This approach has historically yielded some of the best long-term returns. The primary challenge is the potential wait following a market downturn. However, that topic deserves its own detailed discussion in another post.