In a word – yes! Investing is one of the more proven ways to build wealth over time. The better question is – Why is investing in stocks a smart move financially?
The answer to this question has to do with the long-term growth rate of the stock market and the power of compounding returns.
Stock Market Returns
Over time, the stock market has been a consistent creator of wealth. Even with the recent Great Recession, it has performed well. Over the past 90 years, the S&P 500 has averaged a 9.8 percent return. In more recent years, the returns have been even better. The S&P 500 had an average return of 11.3 percent from 2010-2015.
Compounding Toward Wealth
The ability to achieve higher returns is only half of the reason you should invest in stocks. The other half is when you compound those annual returns. Compounding is taking your previous earnings and reinvesting them so they make you more money. So, if you invest $100 and earn $10 in year one (a 10% return), you then have $110 to invest in year 2. Now the entire $110 earns you 10% so in year two you earn $11 instead of $10. This continues year after year.
If you were to invest $1,000/year in the stock market, assuming 30 years of 9.8 percent returns you would have $158,000! That’s a gain of $128,000. And the more you invest, the better the return. Investing $5,000/year for the same period (again assuming consistent 9.8 percent returns) would give you a gain of almost $642,000!
It’s this combination of consistent returns and compounding growth that make investing in stocks a powerful wealth creator.