Making a million in the stock market might seem like an impossible task at first. But, if you have a regular savings plan in place and invest your money sensibly, it is entirely possible to retire with a £1m pension pot.
For example, to build a pot of £1.1m all you need to do is put away £400 a month for 40 years and achieve an average annual return on investment of 7% (slightly below the FTSE 250 annual return for the past decade).
However, most investors fail to make the most of the opportunities offered to them by the market because they make a few critical mistakes.
So, if you want to retire a millionaire, here is what NOT to do with your money.
What NOT to do
In reality, there are only two things we can control as investors. When we buy and sell, and fees. We have no control over the global economy or day-to-day market movements. With this being the case, we have to make the most of what we can control.
The simplest way to improve returns is to cut costs. Even though there has been an enormous shift away from high-cost investment funds over the past 10 years, there are still some investment managers out there who believe they can get away with charging 2% a year or more to look after your money — nothing short of daylight robbery.
The numbers say a thousand words. If you invest £10,000 of your hard earned cash into an FTSE 250 tracker fund with an expense ratio of 0.2%, assuming an average annual return of 7%, over an investment horizon of four decades, this initial £10,000 investment will grow to £145,000 including fees.
In the same scenario where fees are 2% per annum rather than 0.2%, after 40 years compounding, the end value is only £72,000. A staggering difference of £73,000.
So, the first step to becoming a millionaire retiree is to search around for the cheapest funds and broker accounts.
You can’t control the market
Tip number two is harder to implement. Most investors over trade, and not only does this increase your average cost, but studies have shown that overtrading usually results in investors missing the majority of market gains.
Indeed, studies show that if investors try to time the market, 99% of the time they get out too soon or too late and don’t buy back in until the bottom has well and truly passed.
The best tactic to ensure you don’t make the same mistake, is to ignore the market on a day-to-day basis. Warren Buffett has always said he makes investments based on the assumption that the market will close tomorrow and not open again for another 10 years. If you are saving for retirement, it might be best to employ the same tactic.
These aren’t the only common mistakes investors make, but they are the easiest to prevent. Ignoring day-to-day market movements and finding the cheapest investment offerings will put you on the right track to making a million.
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Rupert Hargreaves owns no share mentioned. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.