First: A pep talk
But first, a pep talk
Here's the most important takeaway from this entire article. If you invest consistently and patiently, you might find that building a million-dollar investment portfolio is easier than you think.
Let's take a look at a few hypothetical examples. Historically, the stock market has produced returns of about 9% to 10% per year over the long run, so we'll be conservative and say that your investment portfolio will generate 8% annualized returns. Some years it will be less (or even negative), and some years it will be more, but this is a very realistic target when you measure your performance over decades.With this in mind, what would happen if you invested $1,000 and left it alone? What about $5,000? $10,000? Here's a table that shows how much these amounts of money could grow when compounded at an 8% rate of return.
|Time Period||Starting with $1,000||Starting with $5,000||Starting with $10,000|
Notice that none of these amounts even comes close to a million dollars. But remember that one of the keys to building million-dollar wealth is to invest consistently. So, what if you invested $1,000, $5,000, or even $10,000 every year?
|Time Period||$1,000 invested annually||$5,000 invested annually||$10,000 invested annually|
And remember, we're using a relatively conservative 8% long-term return assumption. If we use the stock market's actual historical long-term returns, the million-dollar mark would be achieved in 33 and 25 years for annual investments of $5,000 and $10,000, respectively. Now imagine if you were able to invest $15,000 or even $20,000 per year. And if you invest through a 401(k) or similar retirement plan at work, this would be in addition to the nest egg you're accumulating there.
Are you ready to build your million-dollar portfolio?
Are you ready to build your million-dollar portfolio?Before you get started building your , it's important to set yourself up for success. Specifically, there are a few things you should do first:
- Get rid of credit card debt -- The best investors in the world consistently manage to earn 12% to 15% annualized returns from their portfolios. Meanwhile, the average credit card interest rate in the U.S. is about 24%. In a nutshell, if you invest while paying credit card interest, you're literally setting yourself up to lose money, even if your investments perform well. Paying off high-interest debts should be a priority before you go all-in on an investment strategy.
- Build an emergency fund -- What is the point of putting money into an investment account if you're just going to have to cash out as soon as something unexpected happens? That's why it's important to make sure you're prepared for unforeseen expenses before you get serious about investing.
- Learn the basics -- You wouldn't buy a car before you learn how to drive. So, don't start investing without knowing some of the basic concepts. Just to name a few things, you should familiarize yourself with what a stock is, how ETFs and mutual funds work, what a brokerage account is, retirement account types, and the basics of asset allocation.
- Figure out your investment goals -- Are you a risk-taker, or do you generally prefer to play it safe? Are you investing for a specific goal, such as retirement or paying for your kids' college, or are you simply trying to create a rainy-day account? What is your general time horizon before you need to use the money in your investment account?
On the first two points, we're not saying that if you have any high-interest debt or your emergency fund isn't where it needs to be that you shouldn’t invest at all. We're simply saying those things should take priority. For example, if you have a 401(k) plan at work, keep making your retirement contributions, especially if your employer matches some of what you put in.
Index funds -- Index funds come in both ETF and mutual fund forms and are essentially designed to put your investment portfolio on auto-pilot. For example, an S&P 500 index fund like the Vanguard S&P 500 ETF (VOO -0.5%) simply tracks the performance of the S&P 500 benchmark index over time, which, quite frankly, has been rather strong over pretty much any multidecade period.
Managed mutual funds -- Also known as actively managed funds, these are mutual funds whose managers pick investments with the goal of beating the market over time. There are literally thousands of mutual funds to choose from, and not all have a great track record of performance, so be sure to do your homework.
Investments to get you started
Investments to help build your million-dollar portfolioIn the previous section, I mentioned the importance of learning the basics, so here are a few investment concepts that can help you build your million-dollar portfolio.
Individual stocks -- To be sure, investing in individual stocks isn't for everyone. You'll need the time to research and evaluate stocks, as well as a basic level of knowledge about valuation. To help you get started, there are some excellent stocks with easy-to-understand businesses that are well-suited to beginning investors. Apple (AAPL -0.95%), Berkshire Hathaway (BRK.A -0.0%)(BRK.B -0.11%), and Visa (V -0.78%) are three good examples you may want to check out. Some stocks also pay dividends, creating an income stream in addition to the potential for long-term gains.
Retirement accounts -- This isn't a type of investment, but it can be a great tool to build your million-dollar portfolio. In retirement accounts such as traditional and Roth IRAs, you have some valuable tax benefits that can really add up over time. For example, you won’t pay income taxes on the dividends you receive in retirement accounts each year, nor will you pay capital gains tax. For traditional IRAs, you might qualify for a tax deduction for your contributions, while qualified withdrawals from a Roth IRA in retirement are completely tax-free.
Related investing topics
Understanding Asset Allocation for Your PortfolioBalancing risk and reward is the hallmark of a great portfolio. Here's how to do it.
Wealth Management: Why It is Crucial to Financial SecurityThis advisory service is geared toward wealthy individuals and their financial needs.
What Is Estate Planning?Who needs an estate plan? Basically everyone. Here are eight steps to creating one.
So what are you waiting on?The bottom line is that building a million-dollar portfolio can be easier than you think as long as you do these three things:
- Start investing as soon as possible in top-quality companies and funds and stay invested.
- Invest consistently by adding to your brokerage accounts over time.
- Take advantage of the tools available to you, such as retirement accounts, that allow you to keep more of your gains.
Now, there's no guarantee that your portfolio will achieve a certain level of performance over time, but the long-term statistics don't lie. Stocks (and stock-based assets like index funds and mutual funds) outperform every other asset class over the long run, and there's no reason to believe this will change anytime soon. So, if your goal is to build a million-dollar portfolio, it might be more within reach than you think.