At Ellevest, we’re all about building women’s wealth. So we think about this pretty much all of the time. 

Historically, there have been just a couple of ways to reliably do it.

And it hasn’t been by winning the lottery. Or even by being great at your job. And wealthy, long-forgotten relatives who leave you money have been few and far between.

Instead, to build wealth, you’ve historically had to tap into the power of compounding. 

You remember compounding, right? It’s pretty simple and pretty powerful … but, for many of us, it’s not particularly intuitive. (And it’s also not guaranteed; nothing in investing is.) But the concept is one of essentially earning money on your money. And then earning money on your money and on the money you earned; and then earning money on your money, and on the money you earned, and on the money you earned before that; and then earning money on your money, and on the money you earned, and on the money you earned before that and on the money you earned before that, and so on. (Here’s an explainer if you read that sentence and all your brain said was, “Wait, what?”)

Albert Einstein once reportedly called compounding the eighth wonder of the world. Legendary investor Warren Buffett has attributed his fortune to it almost exclusively (along with “some lucky genes” and “living in America”). 

So how do you tap into this? There have been two primary ways:

One way has been to buy a house. The way a lot of grandparents did, buying a modestly priced home when they were younger, and then selling later for many, many multiples of that.

The issue is that buying a house has never been available to everyone, and it’s getting more and more inaccessible as time goes on: It takes money to buy a home (for the down payment, which can be pretty hefty), most people have to take on debt (in the form of a mortgage), and homes are illiquid (meaning that you can’t always sell them when you want to). It’s even worse for those whose families have been subject to “redlining,” which kept homeownership out of reach for people of color regardless. 

If you could get past all of these hurdles, your home’s value would have historically increased on average by 3.8% a year. In some areas of the country, it’s been more; in others, it’s been less. And of course, the value hasn’t gone up that amount every year. In 2005, for example, you might’ve seen a 13.5% return, but in 2008, you would have lost 12%.

Still, not bad, in the long run. But not particularly accessible.

The second way to build wealth has been to invest in the stock and bond markets. 

Investing doesn’t come with the same barriers as buying a home: At Ellevest, we don’t have a minimum to start investing,^* investments are not illiquid (the markets are open five days a week), and you don’t need to take on debt to invest. 

Also, drumroll please … the annualized return for the stock market has been 10% since 1928. In any individual year, that return has been as high as 50% (1933, post-crash) and as low as -43.8% (1931, mid-crash); but if you had invested exactly $100 in 1928, that investment would have been worth $761,711 by 2021.

Now — and we’re serious about this — past performance is no predictor of future results. And there are no guarantees in investing, whether in a home or in the stock and bond markets. (Or other markets, as we’ve seen in the crypto arena. Oof.)

What we advise: Get yourself investing — at whatever level you are able to, as early as you are able to. To get the power of compounding working for you. And diversify. Do not invest in a single stock, do not invest in a single asset class. Instead invest in a diversified investment portfolio as a means of reducing — not eliminating, but reducing — your risk. (This is what we do for you at Ellevest.)

Disclosures