How Small Gains Add Up to Big Money
Dec 23rd 2011 11:23AM
Updated Dec 23rd 2011 11:32AM
Everybody wants to find the stock that will make them rich in one fell swoop. But those opportunities don't come along every day. Far more often, the greatest investors find success not with big scores but rather by consistently identifying small advantages. Then it's just a matter of putting time on your side, being patient enough to collect small gains that add up over the years to big profits.
Later in this article, I'll show you what one pair of investors is doing to take advantage of some small-ball opportunities. But first, let's look at a couple of smart ways that top investors seek out victories all the time from their regular investments.
One example of letting small gains add up over time is something you probably already do. With any investment that pays a dividend -- whether it be a mutual fund, ETF, or individual stock -- you get small but regular returns on your investment. Sure, those dividend amounts are typically tiny compared to the amount you have invested -- for stocks that pay quarterly, only the best-yielding stocks will pay you more than 1% every three months. But when you consider an investing time horizon that measures in years, even small dividends pile up to big returns, especially if you reinvest them into additional shares.
The clearest example of how this works is when the stock market is performing poorly. Often, a good dividend can turn what would otherwise be a loss for the stock into a positive total return.
For instance, over the past five years, the S&P 500 index has lost about 175 points, or more than 10%. Plenty of stocks in the index have seen their prices go down during that time.
But with a surprising number of those losing stocks -- 41, to be exact -- they paid enough in dividends to turn their total return into a net gain. In a few cases, the turnaround was really striking. Take a look at some of the most extreme examples:
Source: S&P Capital IQ.
Granted, none of those gains is a real home run. But turning fairly substantial losses into gains is still a big accomplishment, especially in a down market.
The second way that small investors beat the market is by regularly adding money to their portfolio. Few investors can make big investments all at once, but nearly everyone can find something to set aside every month, whether it's $25 or $250.
Those amounts may seem small, but given enough time, they build up to real money. When you consider the benefits of strategies like dollar-cost averaging and the power of compound interest, you'll find millions of investors using automatic investing methods -- and many of them will eventually become millionaires.
If you want another good example of turning small gains into big money, look no further than Motley Fool Options co-advisors Jim Gillies and Jeff Fischer. They have a simple philosophy: use options strategies that at the end of the day, in Jim's words, will leave you with "more coin in your jeans than when you started the trade."
After just a couple of years, Jim and Jeff already have a strong track record of success. Using a wide variety of techniques, ranging from the simplest strategies like covered calls and writing puts to crazy-sounding techniques like the iron condor, Motley Fool Options has made money for its subscribers on all but one of the 39 recommended strategies that have run their course. That's a batting average of 97.4%. Not all of those recommendations have given subscribers monster payoffs, but over time, they've added up -- and more importantly, they give investors who would otherwise be afraid of using options the experience they need to have confidence in their options investing.
If you want to learn more about how Jeff and Jim have helped their Motley Fool Options subscribers make money, now's your chance. We've built an interactive "Options U" designed to teach you how to trade options sensibly. Just click here to be directed to the Motley Fool Options Whiz today -- it's 100% free!
At the time this article was published Fool contributor Dan Caplinger likes making small-ball investments. You can follow him on Twitter here. He doesn't own shares of the companies mentioned in this article. The Motley Fool owns shares of UPS, Waste Management, Plum Creek Timber, and Aflac, and has created a covered strangle position on Plum Creek Timber. Motley Fool newsletter services have recommended buying shares of Aflac and Waste Management, as well as writing a covered strangle position in Waste Management. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Fool's disclosure policy gives you all the options.
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