When it comes to investing, many Canadians know that the best strategy for success in the stock market is to buy and hold stocks long term, allowing compound interest to help earn you a tonne of money.
Plus, with tax-advantaged accounts at our disposal, like the Tax-Free Savings Account (TFSA), Canadian investors can make even more money in the stock market by buying high-quality stocks and holding these investments for the long haul.
However, even though most investors know that the best method is to invest for the long term, fear and other emotions can sometimes take over, which causes us to make sub-optimal decisions.
It can be the fear of missing out on a hot stock that everyone seems to be talking about, like GameStop just a few years ago. Similarly, it could be fear that your investments are declining when the markets face headwinds that could cause you to bail out of your long-term investments early when these stocks are selling for a discount.
So if you’re new to investing or want to improve your long-term potential, here’s why investing for the long haul and having discipline is the key to making money in the stock market. Plus, when you invest in your TFSA, you won’t have to pay a cent in taxes.
Why investing for the long run is essential to make money in the stock market
Long-term investing is one of the most important strategies that investors can utilize because it helps to reduce risk, but it also allows investors to take advantage of the power of compound interest.
The focus should be on finding the best businesses that can grow rapidly and consistently for years at a time. Because in the short term, the market can be irrational, which is what makes some stocks overvalued and others undervalued.
Over the long haul, though, the best stocks will continue to gain value, which is why it’s essential to assess each company’s qualities first and foremost.
This way, you can invest in businesses that you believe are the best of the best and have the confidence to hold them for years, particularly during times of market uncertainty. Because it’s during these times when stock prices will often temporarily dip.
And if you aren’t confident in the business’ long-term ability, you could find yourself panic selling as these stocks fall in price at a time when you should be using the opportunity to buy more shares while they are ultra-cheap.
Therefore, if you want to know one of the simplest ways to make money in the stock market, it’s essential to find high-quality stocks to buy and hold for the long haul. It will help you to mitigate short-term volatility, but more importantly, it allows you to take advantage of compound interest.
Why is compound interest so important?
Compound interest is essential because the longer you own a stock, the faster your capital can grow since the gains become exponential.
For example, if you started investing today with just $50,000 and saved an additional $6,000 a year ($500 a month) for 30 years, in total, you would have saved $230,000 ($50,000 + $180,000).
And if that money was invested in the stock market, where you earned a compounded annual growth rate (CAGR) of 10%, after 30 years, your total portfolio value would be over $1.9 million on just $230,000 in savings.
However, if you continued investing for just 10 more years, your total portfolio value would increase to more than $5 million, more than double the $1.9 million by investing for just 10 more years. Such is the power of long-term investing and compound interest.
And while earning a 10% CAGR is a significant return, it’s not necessarily impossible to reach. Plenty of stocks, such as Alimentation Couche-Tard, have grown at much faster rates over the last decade and beyond.
For example, Couche-Tard has earned a CAGR of 21.4% over the last decade and 23.2% over the last 20 years.
So if you’re wondering what the best way to make money in the stock market is, it’s essential to utilize your TFSA, invest for the long term and focus on finding the best businesses that you have confidence can grow for years to come.
