While $10,000 is not a fortune, it is enough to create meaningful wealth over the long term.
Consider that $1,000 invested in Amazon would be worth nearly $220,000 today, growing at an average annual return of 30.88%. Or that $1,000 invested in Berkshire Hathaway in 1970 would be worth nearly $10.2 million today. Invested wisely, even a small amount of money can compound, and like a snowball, grows faster and faster the longer you stay invested.
If $1,000 can do all that, then $10,000 can be truly transformational if you invest wisely.
Albert Einstein is said to have remarked that “Compound interest is the eighth wonder of the world. He who understands it earns it … he who doesn’t … pays it.”
Compounding refers to what happens when you stay invested, reinvesting any gains, and stay the course for the long haul. If you allow your wealth to compound, it grows and reaches a tipping point where the rate of growth accelerates. When people say the “rich get richer”, this is why.
Open an IRA
If you want to use the power of compounding to your advantage, you should open an individual retirement account (IRA). There are four main classes of IRA: Traditional IRA, Roth IRA, SEP-IRA, and SIMPLE IRA. Investments made through an IRA are tax-deductible or tax-deferred until you decide to remove your money from your retirement accounts. What that means is that, not only do you want to stay invested and reinvest gains, you are using those deferred taxes to help you build wealth. Think of it as a loan that you can decide when to repay.
An IRA is superior to a 401(k) because it comes with greater investment freedom and if you open a relatively new class of IRA, the self-directed IRA, you can access a range of alternative investments, such as real estate, private equity, private mortgages, oil and gas limited partnerships, horses, intellectual property and precious metals. If you want real flexibility, you need a self-directed IRA because it exposes you to assets with a higher ceiling for growth.
Invest in Asset Markets
Wealth, ultimately, is about the number of assets you have. You want to accumulate assets. The simplest strategy is to go for stability. Given our inflationary moment, you don’t need a reminder that you need to invest in real assets. You can do this by investing in real estate through real estate investment trusts (REITs), and by investing in gold, by opening the best gold IRA account. If you invested $10,000 in gold in 1970, as the United States entered stagflation, and held it to today, that would be over $535,000 today.
Passive investing is a great strategy, so invest with the market. 2022 is the year of Queen Elizabeth II’s platinum jubilee. If you invested $1,000 in the S&P 500, or the Dow Jones Industrial Average (DJIA), when she was crowned in June 1953, that investment would be worth nearly $1.62 million today if you invested in the S&P 500, or nearly $1.2 million invested in the DJIA.
So, a good place to start is by investing in the market through mutual funds or exchange-traded funds (ETFs). You also want to buy a handful of stocks in quality companies trading at a discount to their value. You want companies that you believe you can hold onto for decades. There are few of these around. This is inherently riskier than investing in the broad market, but if you are conservative and discriminating in your selection, you should be able to build a small portfolio of stocks for the long haul. You also need some bonds in the mix.
Diversification is important to your strategy. This will ensure that when one asset class is down, other asset classes will bolster performance. Again, buy conservatively.
Overall, the lesson is clear: be conservative, and invest for the long haul, allowing diversification to protect you, and compounding to build your wealth.
By Staff Writer.