Can investing in the stock market make you a millionaire?

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With all that’s happened in the world within the last ten years, you may be forgiven for thinking that it is tough to build your wealth.

After all, we had the Global Financial Crisis back in 2008-2009 which decimated banks and financial institutions, leading to a deep bear market where indices plunged up to 60 per cent.

Fast forward to today, and the world is mired in a severe pandemic that has sickened millions and caused untold suffering to many economies and businesses.

Some may believe that physical real estate is an effective way to build wealth, as Singapore has seen many millionaires minted from rising property prices over the decades.

The uncomfortable truth is that property could rise and fall in tandem with the health of the economy.

But with growth slowing in recent years and the government implementing cooling measures to cap runaway property prices, it’s going to be very hard to replicate the success of earlier property investors.

So what options are we left with? Leaving our money in the bank is not the way to go as the interest rates provided are abysmal.

The secret to becoming a millionaire is to invest in the stock market by owning great businesses over the long-term.

For those who think that it’s not possible, stay with us and we will explain why any man in the street can achieve significant wealth through stock ownership.

A recipe for success

Let’s use a food analogy to understand investing much better.

When preparing to cook a dish, we need to have a set of instructions on how to prepare it, as well as the requisite ingredients.

For investing, this can be likened to an investment philosophy and plan that you can rely on to build and grow your capital over the years.

Your ingredients for it? That would be the spare cash that you sock away every month from savings, as well as the cash stash you keep with you in the bank or biscuit tin.

Growth as a powerful ingredient

Next, we look for strong and enduring growth companies that can provide the fuel for our portfolio to increase in value.

These are businesses that can compete effectively in their respective industries, adapt to changes in the business environment, and continue to post higher revenue and profits.

The idea is to regularly inject money into a portfolio of such companies.

You will end up seeing your portfolio grow in two ways — through the regular additions of money to it, as well as organic growth through capital gains when the businesses perform well.

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Some companies have the ability to grow over the decades, making their investors extremely wealthy.

The trick is to identify the right companies to park your money with, and then just sit on them as they perform their magic.

Take Nike for example. If you had invested $1 in the company in 1990, you would have multiplied your wealth by nearly 100 times as the share price has grown nearly 100-fold in the last 30 years.

Another well-known company that you probably spot in every mall is Starbucks. An investment in Starbucks at US$3 (S$4) per share back in 2000 would have grown nearly 25 times in 20 years, with the share price closing around US$75 recently.

Adding a touch of dividends

Dividends act as a sweetener to any investment recipe and help to increase your total returns.

Although many growth companies may initially not pay out any dividends, some, such as Apple, have started paying out a dividend once their cash balances grow too large.

Dividends provide a source of passive income and are useful for adding to your investment cash stash.

For retired folks, these dividends also provide some measure of spending power once their active income source dries up.

Mix these up, and compound

The idea is to mix growth and dividends to form a potent formula for powering up your portfolio.

Dividends are reinvested back to buy even more shares of great companies, in a process known as compounding .

Albert Einstein, the famous scientist, once commented that “Compounding is the eighth wonder of the world“.

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With regular cash injections, growth of the underlying companies and the reinvestment of dividends, you should easily be able to achieve your goal of becoming a millionaire.

A caveat, though.

The key here is to stay the course and not waver. This wealth-building journey cannot be achieved within a short period; in fact, the beauty of compounding will only show itself after years.

But if you can steadfastly follow this proven formula for building wealth, then you rightfully deserve to enjoy the rich rewards that come with it.

This article was first published in The Smart Investor. All content is displayed for general information purposes only and does not constitute professional financial advice. Disclaimer: Royston Yang owns shares in Nike, Starbucks and Apple.