Investing in the stock market is one of the most passive forms of passive income I know and I believe it should be a part of everyone’s passive income portfolio. Because of the little maintenance it requires it’s a great foundation for your portfolio. It will generate an arguably moderate return, but it will do so in the background, leaving you with tons of time to pursue other streams that might require more time an effort to set up or maintain.
When I say this you need to keep in mind I don’t think of myself as a professional trader. I know little about financial reports and all the other ingredients that drive the markets. Because of my ignorance in this field I’ve chosen to be a long term investor and take advantage of the growing trend that the overall economy has, if not year over year at least decade over decade.
So how much can you make investing long term?
If you are looking for the short answer, its 6% annually.
If you look at financial data going back 100 years or more you’ll find that the growth rate of the economy is remarkably consistent over long periods at a growth rate of roughly 6% annually. This accounts for all the ups and downs, the 1929 stock crash, the Arab oil embargo in 1973 or the dot com bubble. Even with all those events pulling the chart down the economy has still grown an average of 6% per year for the past century, including all the companies that went down and anything else you can think of.
Here is a chart that illustrate the growth of the US stock market since 1871.
It’s worth mentioning that 6% is the overall appreciation of the stock values, without accounting for any dividends paid over that time which you could chose to spend or reinvest, making the compound interest curve play even more in your favor.
A 6% annual return won’t fix all your problems unless you have a lot of money to start with, so don´t look at the stock market the place to go from cero to riches, at least not with this long term strategy.
A 6% annual return could mean a healthy growth for your savings generated through other sources of income though. And if you hold a diversified portfolio this is a relatively safe investment to make in the long term.
Also remember we have taken the whole US stock market under consideration to come up with this 6% number. If you don’t just go and buy every single stock in the US market but instead purchase only some stocks chances are you can actually make more than 6%. This will obviously depend on which stocks you buy and which ones you don’t (always remember to keep a diversified portfolio though, you are not looking for a home run but for the overall growing trend of the economy), so there is not chart I can show you to support my next statement, but after talking to quite a few people who have been investing long term for a while now the consensus seems to be that the annual returns can reach an average of 10 to 12%.