Trying to make a million in the stock market might initially seem like a hopeless quest. Indeed, many thousands of people have wanted to get rich quickly by investing in stocks, and almost all of them have failed.
But you don’t have to be one of these people. Making money from stocks is not as complicated as it first appears. You do not require a degree in finance or a high IQ to succeed. All you need is discipline and a long-term outlook.
How not to fail
The two reasons why most people fail at investing are a) they are too impatient and b) they trade too much. Jumping in and out of stocks, hoping to pick the next big winner for the next seven days, is not only exhausting but expensive and you are unlikely to achieve the returns required to make the strategy worthwhile.
The solution to both of these problems is to buy and hold high-quality stocks for the long term. This approach requires much less effort on your part and is almost certain to produce better returns over a period of many decades thanks to the magic of compounding.
Using this strategy, you only really need to make one trading decision every year, and you can sit back, relax and let the money roll in for the rest of year. Not only is this the easiest way to invest, over the long term you’re likely to outperform the vast majority of other investors.
For example, over the past 15 years, shares in Unilever have produced a total annual return for investors of 9.1%. This return has been enough to turn a simple £150 a month investment into £29,131 over a period of 10 years (excluding commissions). Over 20 years, just £150 a month would have grown to £100,000.
A similar investment in British American Tobacco (which has returned 16.4% per annum over the past 15 years) would be worth £275,400 (excluding commissions) after 20 years.
In comparison, a study by Dalbar, Inc, showed that the average investor had achieved a 20-year annualised return of just 2.5%, enough to turn £150 a month into £46,677 over 20 years.
Don’t be average
The above shows precisely how easy it is to beat the average investor by investing in high-quality stocks and holding for the long term. Not only should this approach allow you to outperform, but it will also mean you spend less time researching shares, which means you can spend more time optimising your savings and doing things you enjoy.
Put simply, a minimal effort investing strategy will not only help you make a million with ease, but it will also give you more free time as you spend less time worrying about the markets (which you can’t control), and more time polishing your personal finances (which you can). And with more time to focus on making sure your day-to-day finances are under control, you’re more likely to improve your overall financial situation.
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Rupert Hargreaves owns shares in Unilever and British American Tobacco. The Motley Fool UK owns shares of and has recommended Unilever. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.