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As the stock market has done over the past few months, once it enters a period of volatility, it can be a scary time for investors.
Portfolio values ​​can suddenly drop dramatically. For long-term investors, that may not be important. After all, paper loss is nothing more than paper loss.
However, psychology is strong and it is not always easy for investors to ignore the rapid fall of stock prices.
Is turbulence in the stock market inevitably a bad thing?
no. In fact, it is a way for long-term investors to grow their wealth faster, potentially allowing them to retire faster than planned.
One situation, two great wealth opportunities
There are several reasons for this.
One is that sudden stock prices can improve your long-term capital gains.
take WPP (LSE:WPP) As an example. The advertising giant’s stock price exceeded £12 in February 2022. Recently, stocks have been selling for less than £6.
So imagine (just explaining the points) that at some point in the future, the stock will reach £24. Investors who pay more than £12 will almost double the value of their investment. In contrast, investors who bought under £6 at recent prices will have seen more of their investments 4x.
There is no guarantee as to what WPP share price will do in the future, but this example shows the simple point that paying less on the shares could lead to more capital gains compared to more payments.
The second reason stock market turbulence can help investors grow faster is yield. Currently, the dividend yield on WPP shares is around 6.8%. However, investors who buy recently, like last December, have earned 5.1% as stock prices rise at the time.
Building a bargain portfolio
We formulate a portfolio at 5.1% each year, and its value could double in 14 years. In contrast, it takes just 11 years, combined at 6.8% per year.
The difference between stock market crashes in advance and yields when purchasing stocks in advance can be even greater.
Also, please note that compound interest is related to dividends only. Capital gains like those described above can help bring things further.
But are things really that simple?
Of course, there is no guarantee in the stock market. Market outlooks have deteriorated significantly, and shares can crash during market turbulence. Several large companies have reduced their dividends following the stock market crash in 2020, including WPP.
Therefore, careful sharing choices and diversification are important.
Has WPP stocks recently fallen as risks like AI reduce the need for creative institutions and the economy undermines weak advertising demand? perhaps.
But the business has proven models and we hope that advertising agencies will stick in some way. AI can even help them by reducing staffing costs.
With a well-known institution under its umbrella, showing considerable strength in advertising demand through its cost-saving benefits and for now, WPP looks like a potential stock market bargain to me. I recently added it to my portfolio.