Winning in the stock market requires the right wealth accumulation mindset, and ironically, most people who build wealth successfully do it with great help from the stock market.
So today, let’s consider how most people think about accumulating wealth, and how you should do it, by…
- Tracking the right wealth accumulation metrics
- Finding the right investments to build sustainable wealth
- Being patient for a long enough time to allow for compounding
Your First Hurdle: Focusing on the Wrong Results
If you pull up your online brokerage account, you’ll tend to see a few things. It should look like your online banking account, with balances prominently displayed. As the market moves, as prices go up and down, the balances on your investment accounts also move.
If the market goes up 4% in a day and your account increases by $1,000, many investors feel as if they “made” $1,000. It’s hard to not think this way when that’s how our accounts are displayed.
However, the reality is that you didn’t “make” $1,000. You only make money when you sell.
This fixation on current balances and current prices motivates investors to seek short term profits and feel disappointed when they don’t come.
An investor might have a wealth accumulation goal in mind:
- $1 million
Especially that $1 million mark. People want to be able to boast that they are a “millionaire”. But that stuff doesn’t matter. The balance in your brokerage accounts doesn’t matter at all.
What does matter is the freedom that your account can provide you.
Here’s the other problem…
Let’s say you finally hit your $1 million mark and decide you don’t need to invest anymore. You’re going to spend your net worth, let’s say $100k / year. That sounds great at first, but consider that your income isn’t remaining flat. You’re actually losing money each year because of inflation.
Cheeseburgers get more expensive as the year goes on, gasoline gets more expensive, cell phones get more expensive… That $100k will get less and less useful– and will eventually run out.
Here’s how investors need to think about it.
Wealth Accumulation Mindset: Focus on Income
Reaching for goals is good, but the journey of investing never ends. Where you need to shoot for when trying to accumulate wealth is an income stream from your investments, and one that helps you beat inflation.
Let’s take some very conservative averages.
–Average earnings growth of about 7% per year
–Average dividend growth of about 7% per year
–Average return of about 10% (earnings + dividends + reinvestment)
Now let’s flip the mindset. Instead of chasing high balances or a certain money goal, let’s chase increasing income.
Say you’re investing $150 / month into a dividend paying stock, like I recommend. Let’s say each stock is $150, has a dividend of $4.50 (3%), and grows at the averages above. And you’re reinvesting the dividends.
Each year, your dividend income will exponentially increase. The 1st year is $55.62. By year 3, it will be $182.66. That means you’re essentially getting an extra month of saving, absolutely free.
By year 5, you’re at $334.07, or 2 months of free savings. By year 8 you’ll be at $617.82, and by year 16 you’re at $1,864.01. Said another way, by then you’ll be doubling your original savings output, just because your investments now give you extra income.
Do you see how the mindset is different?
Instead of worrying about what the current balance is, and feeling sad when it drops, you’re watching your income stream grow as time passes by- regardless of what the market is doing.
And the more and more you invest, the faster your income stream grows.
Once you hit a point where you don’t want to reinvest and instead want to live on the income and wealth you’ve accumulated, you’re again in a better spot than the $1 million hypothetical above who’s living on $100k a year.
Instead, you’re drawing from your dividends that are increasing 7% a year. So your income each year increases faster than inflation, and won’t run out if you can avoid selling shares.
Now let’s throw some great stocks into the mix, to try and accelerate the wealth accumulation process.
Pick the Right Dividend Stocks for Compounding
One of the great things about business is that some businesses can be so revolutionary, or valued so much, they can make massive profits for years.
Think of some of the great businesses that are still around today.
–McDonald’s: Everybody loves a cheeseburger
–Coca-Cola: What’s a trip to the movies without a soda
–Walmart: Need something quick… they’re everywhere
–Procter and Gamble: So many household brands (Febreeze, Crest, Vicks…)
Owning just one of these can give you an overflowing income stream, possibly for the rest of our life.
Real life example: $MO
Altria Group ($MO) has been one of the best performing stocks of all time.
I did some calculations to see how its dividend growth compared to the stock market average. Data before the 1990s is very hard to come by– but luckily I’m a nerd and have a stock market booklet from 1971.
The stock has split 5 times, with a 3-for-1 and 4-for-1 in the mix. I’ll save you the mental labor: the dividend has essentially grown 13.27% per year over 40 years (1970-2010).
Because of the lower yield, it took 17-18 years to get that doubling of investment income from dividends alone. But, it grows like crazy from there.
- By year 23, you’d be putting in $1800 per year and getting $4k in dividend income. That’s like putting a dollar into a machine and getting 2 back.
- By year 28 you’re putting in a dollar and getting 4 back.
- And by year 40 you’re making 19.68x what you’re putting in, and by the way that income is likely to continue growing (above inflation) even if you stop depositing money.
Find me a savings account that pays you like that.
Now I obviously took an extreme example; this has been one of the best performing stocks of all time. However, the example at the top of this blog post was very average, and it’s not unreasonable to think you can land somewhere in the middle.
Even at the average 7% growth, you’re looking at putting in a dollar and getting $5.98 back by year 40– so your profit potential is massive.
I hope this gets you as pumped up as it gets me.
Dividend reinvestment is intensely powerful, but much in the same way that a single seed can grow into a massive tree– it takes quite a bit of time and patience.
A company that is slightly better than average will have its gains magnified over a long time period, because even a percent or two grows to multiples in the final result when it compounds.
Finding those types of investments, and the patience and mindset shift to follow through with them over time, is your last critical step to wealth accumulation.
Buy Great Dividend Stocks at a Good Price
My preferred method: looking for dividends AND value.
And instead of wax poetic on that topic until the end of time, let me tell you this… This blog is filled with posts on how to do just that.
I’d start with learning about value investing and how the single concept of buy low, sell high can lead to massive gains.
Then peruse the posts on this blog about dividends, and especially the inspirational posts that show how some of the best dividend stocks produced massive compounding over decades, and that these weren’t obscure names.
From there, the last piece of the wealth accumulation puzzle is simple.
Patience, and the power of compound interest.
I hope these practical examples above really showed you how massive returns from the stock market can be. You have the ability to change your life, if you seek out the right information and put it into practice.