One of the aims of most investors is to build a portfolio worth seven figures. While this is not an easy task, it is achievable for most investors. That’s because the returns on shares have historically been exceptionally high, which makes the overall returns on even modest amounts of capital very impressive.
Historical returns
For most people, the length of their working lives is at least forty years. Over the last forty years, the S&P 500 has recorded capital gains of 407%. On an annualised basis, this works out at a return of 4.1%. When dividends of around 2% are added to this figure, it provides a total annual return of around 6.1%. Therefore, assuming the same rate of return over the next forty years, you would need to invest a lump sum of just under $94,000 at the start of your working life in order to become an investing millionaire.
Reality
However, the reality is that very investors have a lump sum of that size available at a relatively young age. Furthermore, they tend to invest in small parts over a period of time as they get a better paid job, or their mortgage payments fall. Therefore, it is possible to become an investing millionaire without having a lump sum approaching six figures.
However, it does make a significant difference if you are able to invest at a younger age. That’s because it allows the effect of compounding to have as big an impact as possible. Using the 6.1% annual return discussed earlier, reducing the length of the investment horizon severely hurts future value. For example, investing that same $94,000 for thirty years rather than forty years would leave you with $555,000 rather than $1 million. As such, starting to invest even a small amount in the early days of your career can make a major difference to your chances of becoming an investing millionaire.
Stock market
Of course, the 6.1% annual return figure is an average over a long period of time. It is unlikely that returns will be close to 6.1% in any given year since the stock market can endure significant booms and busts. For example, if the forty year period had included the years from 1928-1950, the overall return figure would have been much worse. That’s because this period of time include the Great Depression and World War 2. During this time, investment returns were mostly negative.
Therefore, there is an element of luck in the return on shares. The next ten years may see stock markets double or halve. This could either increase or reduce your chances of becoming an investing millionaire. External factors such as a great recession or conflict are impossible to accurately predict years down the line.
Outlook
Due to the uncertainty of returns, the length of time it will take to become an investing millionaire will differ for different generations. Similarly, it will be a shorter period for people with larger amounts of capital in their younger years. However, by following simple rules such as diversifying among different geographies and industries in order to reduce risk, as well as starting at a young age and reinvesting dividends and profits, it is possible for the vast majority of investors to become investing millionaires.
