As the manager of what’s become the UK’s most popular fund (Fundsmith Equity), Terry Smith has helped to increase the wealth of many thousands of investors, including himself. As someone who picks my own stocks, I regularly draw on simple but powerful tips from the celebrated money manager. Here’s a small selection. 

Don’t just buy what’s cheap

Terry Smith’s experience tells him that investors obsess over price. Indeed, he frequently mentions wishing he’d kept a diary since he started his career in 1974. This would have two columns — one for whenever someone asked him whether a stock was cheap and one for if it was a good company. Smith believes that he would have “overwhelmingly” more ticks in the first column than the second. 

This is not to say that Smith thinks the price of a stock is irrelevant. No one wants to overpay if they can avoid it. For him, however, “it’s not the most important question“. Instead, he favours looking at the quality of a business first. One way of doing this is to look at its return on capital employed (ROCE).

Taking this on board, I’ve become a little less interested in valuation over the years and more interested in ROCE. I’ve already done well out of stocks like trading platform IG Group, laser-guided equipment manufacturer Somero Enterprises, kettle safety component supplier Strix and food-on-the-go retailer Greggs. All of these consistently generate high returns on capital (outside of a pandemic). 

This is not to say that Terry Smith would buy these stocks. Nor is blindly buying businesses with high ROCE a guaranteed route to riches. Some I’ve owned have performed woefully. Nevertheless, I’m confident that my winners now outnumber my duds. And over an investment career, that’s what matters.

Don’t time the market

Given his stellar investment returns, one would assume that Terry Smith is rather skilled at timing the market: buying at the bottom and selling at the top. However, he’s very much against trying to do so. As he frequently reflects during speeches, there are “only two types of people I’ve ever met in investment: those who can’t do [time the market] and those that don’t know they can’t do it“.

However, this doesn’t stop Smith from buying on short-term weakness. He snapped up US coffee chain Starbucks and sportswear and trainer maker Nike during last year’s market crash. But these are quality stocks that were already on his radar.

This is why I’m continuing to push money into Smithson Investment Trust — a fund run by his colleagues. This adopts an identical strategy to Fundsmith but focuses on companies lower down the market spectrum. Smithson’s performance has been superb and I might be tempted to take profit. However, I’m continuing to buy nearly every month. Why? I simply don’t know when markets will sink.

I also try to keep my costs as low as possible. After all, there’s only one certainty with frequent buying and selling: it costs money. So, like Fundsmith Equity, I try to have a very low turnover of stocks. Unless I spot something I really don’t like (or spot a great opportunity), I don’t deal very often.

As Terry Smith has reflected, “over the long term, it’s what the company does that makes money, not what you do“.

The post These tips from millionaire Terry Smith are boosting my stock market returns appeared first on The Twelfth Magpie.

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Paul Summers owns shares in Fundsmith Equity, Greggs, Somero Enterprises, Inc, Strix, IG Group and Smithson Investment Trust. The Motley Fool UK owns shares of and has recommended Nike and Starbucks. The Motley Fool UK has recommended Somero Enterprises, Inc. and has recommended the following options: short October 2021 $120 calls on Starbucks. 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.

Buffett’s first rule

Buffett’s first rule of investing — “never lose money” — is good all-weather advice. As such, I think it’s likely the ‘Sage of Omaha’ will continue to recommend that all investors should do their homework, regardless of who might win the US election. The more you know about a company before buying its shares, the better your chances of making money.

Gambling with your cash based on the outcome of events, however tempting, isn’t advised. This is partly why the wealthiest investor on the planet doesn’t have a TV in his office. Not being hooked up to the 24/7 newsflow allows him to concentrate on the things that truly matter. The businesses he buys stakes in.

Buffett’s first rule has an additional meaning for those investing in the UK. By not keeping your shares within an ISA, you will lose money by virtue of paying capital gains tax on any profits you make. To make matters worse, you’ll also be taxed on any dividend income you receive from stocks you own. This double-whammy could really hurt your chances of ever making it to millionaire-status.

Keep buying wonderful companies

Buffett buys shares in quality businesses when they go on sale. The coronavirus crash earlier in the year was an excellent example of when, to parphrase the great man, “we should all have been greedy rather than fearful.” The forthcoming US election could be another. 

Great companies are likely to remain great. This is regardless of who emerges triumphant and whatever decisions they make during their presidential term. Sure, increased regulation of big tech giants, or the resumption of the trade war between the US and China, could make investors temporarily skittish. But the major themes of investing in the years ahead are unlikely to be affected.

Companies specialising in clean energy sources, for example, are very likely to remain popular, given the ongoing concerns around climate change. Demand for healthcare will also continue to rise as populations age. The need for cybersecurity will increase as the amount of ‘smart’ stuff in our homes grows.

None of the above will be impacted by who gets the keys for the White House. Invest accordingly. 

Hold forever

Market commentators will continue to speculate over what a second term for Trump, or a first for Biden, will mean for global markets. The truth is, it really shouldn’t matter to ISA investors buying shares for the long term.

Buffett has frequently said that his favourite holding period is “forever.” Earlier this year, he also remarked that “nothing can stop America when you get right down to it.”

So far, he’s been absolutely right. Pull up a chart of the S&P 500 index over the last 50 years, or so. You’ll see a line rising from the bottom left to the top right. In other words, US stocks have gained massively in value, regardless of all the Republican and Democratic leaders over that time.

Don’t fear any US-election volatility. Do the same as Buffett. Embrace it.

The post Forget the US election. I’d listen to Warren Buffett and buy cheap shares to become an ISA millionaire appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

But which dividend stocks should you buy? For those wanting to stick with only the biggest UK companies, I think these FTSE 100 constituents are great candidates.

Become a dividend millionaire

FTSE 100 power provider National Grid (LSE: NG) doesn’t have the most electrifying reputation among investors. For those looking to build their wealth by allowing dividends to compound, however, this really isn’t the point. Dull is good. 

Analysts predict that the company will return 49.5p per share to investors in FY21. At the current share price, that gives a super yield of 5.3%. Now compare this to the paltry 1% interest you’re currently able to earn from the best Cash ISA available. Is it any wonder that many, including me, think holding too much cash is the biggest way of killing your retirement dreams?

Shares in National Grid currently change hands for almost 18 times earnings. That’s fairly high, at least relative to the firm’s average valuation over the last five years (13 times earnings). However, this premium is probably due to investors regarding the company as something of a safe haven in the current climate given the predictability of its earnings.

National Grid won’t make you a millionaire on its own. Held as part of a dividend-generating portfolio, however, it takes some beating.

Defensive demon

FTSE 100 defence behemoth BAE Systems (LSE: BA) might not to every investor’s taste. For those looking to become ISA millionaires by reinvesting their dividends, however, I think the firm is another excellent pick.

Having understandably paused its policy earlier in the year, the £16bn cap announced in July that it would kickstart dividend payouts again. This move, coupled with the firm’s belief that business will rebound in the second half of 2020 should be a comfort to those already invested.

The shares trade on just 10 times forecast FY21 earnings. That looks seriously good value to me, especially when you consider that the company, like National Grid, has a long history of consistently hiking its dividend.

Assuming it returns the 25p per share analysts predict in 2021, BAE yields just over 5%. The fact that the total dividend should be almost twice-covered by profits also helps to greatly reduce the possibility of a cut anytime soon.

Recovery play 

Packaging giant Mondi (LSE: MNDI) completes this trio of dependable dividend payers from the FTSE 100. 

Unlike the other two income stocks mentioned, analysts are forecasting a dip in the dividend next year to a little less than 59p per share. Even so, this still leaves the shares yielding 3.6% at their current price with the payout likely to be covered twice by profits. 

Mondi is due to release an update on trading on October 15. The decent recovery seen in the share price of late would suggest investors are optimistic about its outlook. Not that the performance over a short trading period should really concern would-be dividend millionaires. The message for them is simple: receive, reinvest, repeat. 

On just 13 times expected earnings for FY21, Mondi offers great value in my view.

The post 3 FTSE 100 dividend shares I think can help you become an ISA millionaire appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Here are just three majestic money-management mantras Buffet lives by. 

‘Never depend on a single income’

Having multiple sources of income can be a great cushion against life’s little (and not so little) tests. A second stream, perhaps by tutoring others in a skill you have or selling stuff on eBay, probably won’t match your primary wage but it should help keep the wolf from the door if the latter is suddenly taken away.

Buffett’s advice is especially pertinent in 2020. The coronavirus has already caused huge job losses around the world. With the government’s furlough scheme coming to an end in October, unemployment in the UK will surely continue to rise. Those with a second income already set up may find it easier to cope. 

As a committed Fool, you won’t be surprised to learn that I think dividends are the greatest second income stream of them all. Owning a stock means you’re entitled to a share of a company’s profits. Assuming it pays these out to holders. Re-investing these cash returns back into the market and taking advantage of compounding can vastly improve your prospects of retiring rich. 

‘If you buy things you don’t need, soon you will have to sell things you need’

This billionaire still lives in the same modest house he bought back in 1958. Why? Because Buffett only buys things he thinks will improve his quality of life. A sprawling mansion isn’t one of them.

Unfortunately, the unstoppable rise of online shopping and ‘one-click’ purchasing means it’s harder than ever for some people to avoid splurging on stuff they don’t need. Many will take on debt doing so, creating problems down the line.

One way of keeping your spending in check is to not wait until the end of the month and saving what’s left. Instead, set up a direct debit to transfer cash to your investment account on the day you get paid.

Treating this transfer like a regular bill payment reduces the temptation to splurge your cash on things you don’t need. It can also help develop the habit of regular investing. 

‘Someone is sitting in the shade today because someone planted a tree a long time ago’

The final bit of wisdom from Buffett today is arguably the most important. Just as trees don’t grow overnight, nor will your wealth. That’s why it’s vital to start investing as early as possible. 

A lot of people fail to heed this advice for fear of making mistakes. Thankfully, there are ways around this. You can employ a professional to invest on your behalf or, as Buffett recommends, buying cheap index trackers that generate the same return as the market. A portfolio containing the latter can be set up in minutes. 

Alternatively, simply learn the basics of stock-picking and adapt your strategy as you go. Any errors you do make can usually be rectified if time is on your side. Ironically, the biggest risk comes from not investing at all.

The post These money mantras helped make Warren Buffett a billionaire. I think they could make you rich too appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Both a growth and income share

Airtel Africa is a provider of telecommunications and mobile money service within Africa. Africa is seen as a high-growth market, and as a market leader in 14 different African countries, Airtel Africa should be able to continue to grow its customer base. The number of customers already stands at over 100m, and with only 45% of the continent’s population owning a SIM, this should continue to grow. A rising consumer base has also seen rising profits. In fact, in the 2020 financial year, operating profits increased by over 20% to $901m.

But as well as the potential for growth, this UK share is also a very good income stock. For example, this year, the firm is paying a dividend of 6 cents per share. This equates to a 10% yield. At the moment, this dividend also looks very safe due to free cash flow of $453m. With the dividend costing $226m, this means that there is still cash left over to reinvest into the business. Consequently, with strong prospects for growth, a dividend cut does not seem likely, and increases may be in store further down the line.

Are there any problems?

Of course, there are no perfect shares, and Airtel Africa is no exception. One of my major concerns is the fact that its EPS (earnings-per-share) has actually been decreasing in recent years. This is mainly because the firm has issued more shares in order to pay off debt. While paying off its large debt-pile has been necessary, this share dilution does put a strain on the share price. As a result, now that its debt situation is much healthier, I hope that the firm will not have to resort to issuing more shares in the near future. Instead, buying back shares would be the ideal situation for shareholders.

Airtel Africa will also be affected by the current economic downturn. This is because currencies have been devalued across many of its markets, including the Nigerian naira, the Ugandan shilling, and the Zambian kwacha. This will place a burden on profits throughout the year.

Is this UK share really a millionaire-maker?

Despite these problems, I’m still highly optimistic about Airtel Africa. Evidently, there is significant room for profits to grow further, especially through the data and Airtel Money divisions. The dividend is also a major attraction, especially as it does look sustainable. As such, through reinvesting these dividend payments into the stock, I really do think that this UK share is a millionaire-maker!

The post Best UK shares: I reckon this FTSE 250 stock could be a millionaire-maker! appeared first on The Twelfth Magpie.

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Stuart Blair owns shares in Airtel Africa. The Motley Fool UK has no position in any of the shares mentioned. 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.

Notwithstanding this, there will very likely be times in any investment career when it makes sense to sell a stock. Here’s are three reasons for doing so.

The story has changed

It’s remarkably easy to fall in love with a particular share, particularly one you’ve devoted time to thoroughly researching.

Sadly, nothing is guaranteed in the market, regardless of how good the company’s story is. Today’s dream stock can quickly become a nightmare if events (internal, external, or both) go against it. The key is learning to distinguish a major setback from a temporary hurdle.

One might argue that the investment case for travel stocks has dramatically changed in 2020 due to the pandemic. Even when the coronavirus cloud does finally lift, some companies’ share prices may remain stagnant for a long time afterward due to the financial damage they’ve endured.

A good example from a different sector would be Lloyds Bank – one of the most popular stocks with retail investors.

Despite making it through the financial crisis, anyone backing the shares in March 2009 won’t have made much money since (dividends excluded). Had they switched to technology stocks, however, the outcome would have been very different.

The price is too high

Great shares are seldom without friends and rarely cheap as a consequence. What’s more, the very best of the best just go on getting more expensive as they continually beat expectations. This explains why top UK fund manager Terry Smith thinks there are more important things to focus on than the price you pay for a stock. 

Then again, there will be times when a share price becomes so utterly detached from a company’s fundamentals that taking at least some money off the table feels like the right thing to do (especially as you won’t pay tax on capital gains if it is held within an ISA). An example of this might be when a company is hyped beyond belief but has yet to make a profit.

Even if a stock’s prospects really are great, it will take time for these to be realised. Will all investors be prepared to hold and wait? I doubt it. 

You’ve made a mistake

Few active ISA investors are able to strike it rich without making a few/a lot of mistakes along the way. This may be the result of acting too cautiously, recklessly, or simply picking a stock that didn’t work out.

Regardless of the reason, admitting that you’ve made a mistake can be hard. This is why we cling to losing stocks even when there’s little chance of recovery. Even if a company is able to turn things around, the numbers might still be against you. Being 50% down requires a share to double in value just to get you back to break-even.

Now, that sort of move isn’t impossible, particularly in illiquid small-cap stocks, but it can take a while if it comes at all. In the meantime, other companies are making great money for their investors.

The opportunity cost of staying invested in a loser can often be greater than accepting the loss and learning from it. 

The post Want to become an ISA millionaire? Know when to sell shares! appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has recommended Lloyds Banking Group. 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.

Here’s why I can’t recommend this strategy. 

Market crash timing

Timing the market is fiendishly difficult. Who knew back in March that stocks would experience one of the sharpest falls in history, or that the FTSE 100 would tumble to as low as 5,000?

The simple answer is no one. Not even the highly-qualified fund managers with their armies of analysts and wealth of data. There were simply too many factors at play. And if the professionals can’t do it, what chance do any of us have of predicting the next one?

There might not even be another market crash for years!

Strong recovery

Just as we couldn’t predict markets would fall so dramatically in March, nor could we foresee the recovery would be so immediate or so strong. In the US, the S&P 500 index is already back to where it was in February. 

The fact that many new investors have made big money on this rebound makes picking the bottom look misleadingly easy. The survivorship bias also means we’re less likely to hear about those who sold out in March and vowed never to return. 

Show me someone who has consistently and precisely timed the market throughout their career and I’ll let them manage my money. The shorter the time frame, the larger the role luck can play in stock market success. 

I think there’s a better way.

A better route to riches

First and foremost, find great companies worth investing in. What makes a company ‘great’ is contentious. However, looking for the same things as some of the UK’s top fund managers is a good place to start.

Solid companies have a higher likelihood of making you money in the future, even if you need to pay a little bit more than you’d like. Buying an already-struggling business, even at a low price, makes things doubly-tough. The company must first survive a market crash and then turn itself around.

Secondly, hold as much stock as you can within a Stocks and Shares ISA or, for those with one eye on retirement, a Self-Invested Personal Pension (SIPP). Do this, and any profits you make will be free of capital gains tax. 

Third, buy regularly. Since you can’t expect to win at the game if you don’t play, holding back with the aim of timing the market perfectly is a fool’s errand. Over the long term, it’s compounding that will make you a millionaire, not the brilliance of your timing.

So, accept what you can’t know and control what you can, namely fees and your risk exposure. For the former, take advantage of monthly investment plans offered by your broker. This can reduce commission costs by roughly 90%!

Lastly, check your portfolio irregularly. A watched pot never boils and your holdings won’t magically grow in value simply by looking at them. In fact, this hour-by-hour, day-by-day approach makes it far more likely you’ll think you can time the next market crash.

Spoiler: you very probably can’t. 

The post Waiting for the NEXT stock market crash? I’d do this to become an ISA millionaire appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

1. SIPP it

As much as we love the standard Stocks and Shares ISA at the Fool UK, we’re just as positive about another tax-efficient account — the Self Invested Personal Pension (or SIPP). As its name would suggest, this savings vehicle is ideal for those whose goal is to build a big nest egg for their golden years.

The great thing about the Self-Invested Personal Pension (SIPP) over the ISA is that it forces you to focus on the long term by preventing you from accessing your money until the age of 55 (rising to 57 from 2028). An ISA, on the other hand, can be raided at whim, which isn’t really conducive to generating wealth for retirement.

Another benefit of the SIPP over the standard ISA is that the government pays tax relief on any contributions you make. Pay in £800, for example, and you’ll receive an extra £200 to invest (assuming you’re a basic rate taxpayer). You can also pay in double the amount you can into an ISA (up to £40,000), although be aware that this allowance may change in the future. 

2. Make time your friend

If you want to make it to millionaire status, you need to make the most of what Einstein supposedly labelled the eighth wonder of the world: compound growth (or interest on interest).

To give you an idea of just how impressive compound growth is, £58,000 will, after 10 years be worth over £150,000, assuming an optimistic-but-not-impossible average annual return of 10%. After 20 years, it will be worth slightly more than £390,000. Stay invested for 30 years and you’ll have over £1,000,000.

To generate this kind of return in reality, however, you’ll need to be comfortable with having most of your cash tied up in stocks. This is vital since equities have consistently been the best performing of all assets over the long term.

To be clear, the longer you stay invested (and the more you save), the better your chances of retiring a millionaire.

3. Become a millionaire on the cheap

Becoming a millionaire is all about learning to buy at the lows and sell at the highs, right? Ideally, yes. The easiest bit of investing advice to convey is, however, also the hardest to achieve in practice.

Very few people are able to get their timing just right; even fewer are able to do so consistently over years of investing. This is why we think it’s a good idea to buy regularly and automate the process as much as possible. Most investment platforms offer their clients the option to buy on a set day every month, thus avoiding the temptation to ‘time’ their purchases.

Another positive to doing this is that it keeps costs low at around £1 per trade (costs vary depending on which platform you use). That’s far better than paying the normal charge of around £10-£12. Over many years of investing, paying the latter can have a huge negative impact on returns regardless of how good a stock picker you prove to be. 

A smart (but always Foolish) investor always endeavours to keep costs as low as possible to reap the rewards further down the line.

The post 3 smart moves to help you to retire a millionaire appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

At the beginning of 2020, shares in the market minnow were changing hands for just 14p each. At the close yesterday, the very same stock was trading at 426p, so some investors will have made a lot of money.  

Will this form continue? Today’s update from the company was certainly encouraging. That said, I’d be wary of becoming excessively bullish on the shares if I were thinking of buying now.

Novacyt in demand 

Taking into account its agreement with the UK Department of Health and Social Care and collaborations with GlaxoSmithKline, AstraZeneca, and The University of Cambridge, the clinical diagnostics specialist announced it had generated £90m worth of orders for its Covid-19 test. 

As a further sign of just how much demand there is, the company went on to remark it’s now supplying the test to “more than 100 countries” with new approvals having just arrived from Ecuador and Malaysia. What’s more, the firm also spoke of “evaluating potential options to further expand its presence” in the US.

Of course, orders are only good if they can be fulfilled. Earlier this month, Novacyt said it would increase manufacturing capacity to roughly 8m tests per month. Today, it revealed it expects to meet this output in June. In addition to its two manufacturing sites, the company has also signed deals with six other manufacturers, allowing it to scale-up beyond this number when needed.

CEO Graham Mullis was understandably bullish, commenting that the visibility on sales was “transformational” for the company. He also said this demand “could continue for some months.”

Today’s news was undeniably positive. As great as all this sounds, however, I’m beginning to wonder if the ‘smart money’ has already been made.

Priced in?

Novacyt’s share price was up a few percent in the first few minutes of trading. That’s nothing like the gains seen in previous trading days. This suggests to me the market had already priced in much of today’s statement. 

This reaction highlights the problem with small-cap investing. Since a lot of these companies are still loss-making (Novacyt being an example), all momentum rests on hope and hype. That’s fine if you manage to time your entry well, but it can be testing when investors begin taking profits. 

Although they’re available for 436p, as I type, Novacyt’s shares were trading as high as 491p in mid-April. Had you bought at the peak, you’d now be 11% underwater. In the meantime, more established, profitable and liquid (easily traded) FTSE 100 or FTSE 250 stocks would have made you a lot of cash in the recent rally.

Don’t get greedy

Novacyt’s gains over the last couple of months have been nothing short of remarkable. Notwithstanding this, I’d caution anyone from buying a lot of the stock now. With the next stage of the pandemic hard to accurately predict, I think there’s still potential for people to lose their shirts if they chase gains and go ‘all-in’. 

If you simply must invest, I’d advise doing so with money that you can afford to lose. Put the rest of your cash in quality stocks that have rewarded investors over the long term. 

The post Can coronavirus test-maker Novacyt still make you rich? appeared first on The Twelfth Magpie.

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• With a yield of 6.8% and a P/E ratio of 12.1, is this a dirt cheap FTSE 250 stock to consider?
• Will SpaceX, Nvidia, or Alphabet be the first $10trn stock?

Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.

Today I’m going to talk about the one thing all new investors must learn and all experienced investors must remember. The fact that we’ve just experienced the worst quarter for stock markets since 1987 makes it even more relevant.

The most important thing

Forget all the fancy money-making strategies you’ve heard. To really increase your wealth, it’s more important to understand the concept of ‘compound growth’.

We experience compounding in everyday life, usually without even recognising it.

Suppose you want to get fit and decide to dedicate 10 minutes a day to exercising. Initially, progress is slow. Over time, however, workouts become easier and your body can do more.

The reason for this is simple: every bout of exercise builds on those previously completed. 

Compounding can work against us too. Allowing ourselves an extra portion of something calorific at dinner might not feel wrong at the time. The result of doing so many times over many evenings, however, eventually shows on our waistline. 

The little things we regularly do add up.

So, it can make me rich?

Yes. Compounding is the not-so-secret sauce that can also make you wealthy. 

Imagine investing £20 in the stock market every month (or £240 per year) for the next 30 years. Over this period, markets rise in value and you re-invest any dividends you receive.

Although the actual rate of return will vary from year to year, let’s say your portfolio returns 10% per annum. So, after one year, your money increases in value by 10%. In the second year, the money you had after the first year increases by 10% and so on. 

After 30 years, you’d have nearly £40,000. It’s grown by so much because you’ve earned interest on interest every year. Your money has compounded. 

Remember, this is the hypothetical result of investing just £20 per month. Put away £50 a month and you’ll have almost £99,000 based on my figures. £100 a month will give you over £197,000. It’s not magic, it’s simple maths. 

The only caveat is that there’s no guarantee the stock market will return that 10% average per year. It could be lower or higher, depending on what you choose to invest in and how those investments perform. 

Dedication required

Compounding can make you rich, but it still requires two things from you: commitment and patience.

Just as practicing the violin once every year won’t lead to any meaningful gains in terms of ability, saving ‘when you feel like it’ is unlikely to substantially increase your wealth.

This is why setting up a direct debit to take even a small amount of money from your bank account to your ISA every month without fail is crucial. By automating your savings, you take out the need to be motivated to save.

Second, learning to delay gratification is vital. Warren Buffett’s wealth has increased massively in later life because he recognised that results aren’t immediate. He continued to invest, through good times and bad. 

Which brings me back to the start. Having the courage to invest through market wobbles is desirable since it allows you to buy more when prices are depressed. The more stock you accumulate at lower prices, the greater the eventual upside will be.

Forget the market crash. Remember the power of compound growth.

The post Forget the stock market crash. Knowing this could help you retire rich appeared first on The Twelfth Magpie.

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Paul Summers has no position in any of the shares mentioned. The Motley Fool UK has no position in any of the shares mentioned. 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.