Investing in stocks is one common way that Canadians can go about building wealth over the long term. But once you’ve decided that you’re ready to invest in stocks, there are a few more steps you need to take before actually buying shares of a company.
One of the first decisions you’ll need to make is deciding on which type of investment account you will use to purchase your stocks. Two of the most common accounts Canadians use are the Tax-Free Savings Account (TFSA) and the Registered Retirement Savings Plan (RRSP).
Both can act as excellent investment accounts, but each comes with its own set of pros and cons.
The beauty of a TFSA is that you can make withdrawals at any time you’d like, completely tax-free. The same cannot be said about an RRSP account.
How to turn $5,000 into $50,000
The beauty of compound interest will help turn your portfolio into $50,000. All you will need is an initial lump sum of cash and time.
At an annual growth rate of 8%, if you’re $5,000 was invested today, it would take about 30 years to grow into $50,000. Not too bad for a one-time investment that required little to no maintenance over the 30-year period.
Now that you have your TFSA ready, now is the time to starting researching what type of stocks to buy. That goal would be to find an investment that would grow at an annual rate of 8% or higher.
I’ve covered two Canadian companies that have both generated annual growth above 8% over the past decade. If history repeats itself, these are two companies that could help turn your $5,000 into $50,000 in fewer than 30 years.
Brookfield Asset Management
Brookfield Asset Management (TSX:BAM.A)(NYSE: BAM) is a $70 billion global asset management company. It might not be the most exciting stock on the Canadian market, but its track record of growth speaks for itself.
The company’s impeccable balance sheet and diversification of assets are two main reasons why it has been able to easily surpass the gains of the Canadian stock market over the past decade.
Over the past 10 years, Brookfield Asset Management has seen its share price grow by 135%, which would equal a compound annual growth rate of 9%.
Now, let’s compare what a 1% difference in growth would make.
If you invested in Brookfield Asset Management, it would now only take 27 years to turn your $5,000 into $50,000 at a growth rate of 9%.
Constellation Software
Let’s say, for example, that all the hard work you put into researching stocks has paid off. You managed to stumble across Constellation Software (TSX: CSU) a decade ago and smartly invested $5,000 into the company.
Constellation Software has been one of the top-performing publicly traded companies on the Canadian market over the past 10 years.
The $32 billion tech stock specializes in building out vertical-specific software for customers across the globe. The nature of the business it specializes in may be partly why many Canadian investors will admit having never heard of the company before.
The stock has seen its share price grow by more than 3,000% over the past 10 years. That would be earn investors a compound annual growth rate of more than 40%.
If you’re fortunate enough to find a company earning a growth rate of 40%, such as Constellation Software, a $5,000 investment would take just under seven years before reaching a total of $50,000.
Foolish bottom line
It pays to have a goal in mind when investing. Knowing that you have an initial $5,000 to invest and are trying to reach a goal of $50,000, it helps narrow down the type of account you should open as well as what type of investments you should be buying.
