3 proven strategies to help build generational wealth in the stock market

The stock market has long been a powerful tool for building wealth over time. Indeed, by starting early and following smart investment principles, an individual could create a lasting financial legacy for future generations.

Here are three market strategies that could help secure financial freedom.

Passive investing

Passive investing is where someone invests in index funds that track the overall market rather than picking individual stocks. This is a simple, hands-off way to steadily grow wealth.

John Bogle was the pioneer of index fund investing. He argued that “the winning formula for success in investing is owning the entire stock market through an index fund, and then doing nothing. Just stay the course”. 

While this approach might sound boring, it’s proven its worth. Someone who invested £25,000 in the S&P 500 index 30 years ago would now have over £300,000, adjusted for exchange rate changes.  

Admittedly, we don’t know what returns this index will produce in future. But if it returns just 7.5% with dividends (rather than 9-10%), then £300,000 would become £1m inside another 17 years. 

If this person invested £400 a month on top of the initial £25k across these 47 years, they’d end up with almost £3.2m! This calculation assumes an average 8% return.

Investors could also diversify beyond US stocks and consider ETFs that track the UK’s FTSE 100 and Europe’s STOXX 600.

Dividend reinvesting

Next, there’s dividend investing. This involves actively picking stocks that pay out dividends. Now, this approach is more risky because things can go wrong at individual companies and dividends are never guranteed.

However, it also has the possibility of turbocharging the compounding process when high-yield dividends are reinvested. Let’s use British American Tobacco (LSE: BATS) as an example. This dividend stock offers a 7.5% yield, which is well above the FTSE 100 average (currently around 3.4%).

Operating in over 180 countries, the firm owns cigarette brands such as Dunhill and Lucky Strike. While smoking is in overall decline, the firm’s also seeing growth in next-generation products, with brands like Vuse (vaping), Glo (heated tobacco), and Velo (oral nicotine). 

Of course, falling cigarette sales presents risk. Projections suggest the number of smokers worldwide could fall to 1bn by 2040, down from 1.3bn in 2021. However, that’s still a massive market, and the firm continues to make enough profit to pay high-yield dividends.

Putting £5k into the stock should make £375 in dividends after one year. After 20 years, assuming the same yield, share price and reinvested dividends, the investment would grow to £21,240. At that point, the yearly passive income would be around £1,600. 

This approach requires the building of a diverse portfolio of income stocks. But it has serious wealth-building potential.

Growth investing

Finally, there’s growth investing, which has the potential for blockbuster returns. Just consider the 15-year returns of the five well-known stocks below. Admittedly I’ve cherry-picked them, but owning just one across this time would have lit up an investor’s portfolio.

This approach is high-risk, high-reward though because growth companies that suddenly stop growing can quickly unravel.

However, investing £800 a month in growth stocks that collectively average 12% would build a £1m portfolio in just under 23 years starting from scratch. It would take a lot longer with lower percentage returns, but it does show what could be achieved.