Last week, you may have read about a Scottish primary school teacher who passed away leaving £1.1 million in her will.
According to newspaper reports, friends and family were apparently stunned that Margaret Dickson had accumulated such a sum, built-up through decades of investing in the stock market.
Such stories aren’t unknown, of course. But here at Fool HQ, we think that the media has got the wrong end of the stick.
Is it newsworthy – or even remarkable – to make a million on the stock market? No, quite simply.
For me, the newsworthy aspect of the story is that Ms. Dickson apparently lived modestly, didn’t brag that she’d accumulated such a sum, and sportingly left the whole lot to charity.
Do the maths
So how difficult is it to make a million on the stock market?
Living modestly helps, of course. The lower your outgoings, the more money you’ll have available for investing.
But the calculations are quite straightforward.
Put £380 every month into an index tracker, and assume that the stock gains in value – with dividends reinvested – by an undemanding 7% a year. And forty years later, you’ll have £1,003,247 to your name.
The trick lies in beating that baseline.
Because logically enough, if you can double that 7% to 14%, then you can either halve the time taken, or halve the amount invested.
19% returns
Now to some, that 14% will be a stretch too far.
As Barclays‘ highly regarded annual review of long-term stock-market performance highlights each year, over the last hundred years or so the market has delivered annual returns of around 9%.
It’s also fair to say that in recent years, returns have been slightly lower – which is why I used a figure of 7% in the example above.
But that’s looking at the performance of the UK stock market as a whole. In simple terms, it’s what you would have enjoyed if you had been invested in an index tracker over that period, had index trackers existed that far back.
Which ignores the fact that some shares have significantly out-performed index trackers over time. Pick those winners, in short, and it’s a very different story.
Super-investor Warren Buffett, for instance, has delivered an average return of 19% – and over an impressive 48 years. Transforming himself not only into a stock market millionaire, but a stock market billionaire.
It can be done
But there are examples much closer to home of real-life ordinary investors making a million in the market.
Heck, there are examples of real-life ordinary investors making a million inside an ISA – a much tougher challenge, because for many years the government constrained the maximum annual ISA contribution at a level far below the upcoming generous £15,000.
Many serious investors, for instance, will be aware of Guy Thomas’ excellent book Free Capital, which profiles the stories of a dozen highly successful ordinary investors.
Each accumulated £1 million or more by astutely investing in the market – and of those dozen investors, six were ‘ISA millionaires’. Just as interestingly, three of them are long-time members of our Foolish community, of whom two can still be found actively posting on our discussion boards today.
