3 Ways To Take Your Stock Portfolio To Overdrive

If you settle for the average in your stock investments, you could do surprisingly well. After all, the long-term average annual return of the stock market is close to 10%. Investing, say, $ 12,000 a year for 20 years and getting a 10% return would net you over three quarters of a million dollars.

You may be able to do even better than that, however. Here are three ways to get your portfolio going overdrive.

Image source: Getty Images.

1. Add growth stocks to your mix

First of all, understand that you never have to settle for below average results. You can still earn roughly the performance of the market by placing your money in a low cost index fund. There’s no shame in that, because even Warren Buffett has recommended index funds for most investors – and over long periods of time, they have outperformed the vast majority of their more actively managed mutual fund counterparts.

However, you can aim for above-average returns by including growth stocks in your portfolio. Choosing to invest in individual stocks with a significant portion of your portfolio means learning to value companies and engaging in continuous learning, in order to improve your results. For best results, Motley Fool’s investment philosophy would allow you to spread your money over at least 25 promising stocks for at least five years. This way, you will have a better chance of succeeding with at least one or more great artists.

Growth stocks are those related to companies that are growing at a faster than average pace. Thus, they have the ability to watch their stocks soar, as stock prices are ultimately tied to the performance of the company, at least in the long run. However, you don’t want to buy them at any price, as growth stocks can sometimes trade at nosebleed levels. Instead, look for those that are trading at reasonable valuations, given their growth prospects.

2. Consider dividend-paying stocks – and reinvest those dividends

Another way to boost your portfolio is to add dividend paying stocks. Dividends can be very powerful, as healthy, growing companies will tend to increase their dividend payouts over time, paying their shareholders in both good and bad economies. If you have a $ 100,000 portfolio with an overall dividend yield of, say, 4%, you’ll be raising $ 4,000 a year, without doing any work for it. On top of that, you can hope and expect the underlying stock to appreciate over time as well.

As your portfolio grows over time and you approach and enter retirement, dividends can be even more valuable. A portfolio worth, say, $ 500,000 with an overall dividend yield of 3.5% will produce about $ 17,500 in annual income, or about the same as the average annual Social Security benefit.

You can, of course, add both growth stocks and dividends to your portfolio, and in many cases, they can be the same stocks. Rather fast growing companies like Starbucks, Microsoft, Corning, Broadcom, and Cisco Systems all pay dividends.

A smiling person is at the edge of a river, arms outstretched.

Image source: Getty Images.

3. Use the magic of time

Finally, it’s time. You can get the most out of your portfolio, even if you stick with broad market index funds, simply by giving it a lot time to grow. See the table below, which shows how much a Once a $ 10,000 investment can grow, at an average annual rate of 10%:

Over this period …

$ 10,000 will go to:

5 years

$ 16,105

10 years

$ 25,937

15 years old

$ 41,772

20 years

$ 67,275

25 years

$ 108,347

30 years

$ 174,494

35 years

$ 281,024

40 years

$ 452,592

45 years old

$ 728,905

50 years

$ 1.1 million

55 years

$ 1.9 million

60 years

$ 3.0 million

Data source: calculations by author.

Note that while it increases by about $ 10,000 between years 5 and 10, it increases by over $ 40,000 between years 20 and 25, and by over $ 1 million between years 55 and 60. It is the power of composition – and of time.

If you don’t have too many decades to retire, you can aim to optimize your portfolio by making inordinate contributions every year, even if that means taking one or two side gigs for a short or long time.

You have the power to aim for well above average ROIs, if you choose to do so.

This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.

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