The Motley Fool

Forget The National Lottery and Bitcoin! Here’s how I’d aim to make a million

The National Lottery and Bitcoin offer the opportunity to generate high potential rewards in a short space of time. There have been various individuals winning significant amounts on the lottery, while early investors in Bitcoin are still sitting on significant profits despite its decline over the last couple of years.

Taking significant risks in order to generate high returns can work for some people, some of the time. However, the odds appear to be very much against any individual seeking to make their fortune through taking exceptionally high risks. With that mind, seeking a more modest return that is consistent over the long run may be a better means of generating a million.

Consistency

Investing in the stock market may not sound like a means of generating a consistent return. That’s true in the short run, when there are generally significant fluctuations in share price prices. They can be caused by a variety of factors, including economic weakness and industry challenges.

In the long run, though, the stock market has been shown to offer a total annualised return which is in the high-single digits. The FTSE 250, for example, has posted an annualised total return of over 9% since March 1999. And with it trading below its all-time high, it could offer further growth over the coming years.

Compounding

While the stock market’s return is unlikely to make any investor a millionaire in the short run, the compounding of returns can make a real difference to an investor’s long-term wealth. The FTSE 250’s annualised return when compounded over a 20-year period, for example, equates to a 460% total return. This could turn even modest sums of capital that are invested regularly into a sizeable lump sum by the end of the period.

For investors who are able to generate an even higher return than the wider index, the potential impact of compounding could be even greater. While risk may also rise, buying a variety of high-quality stocks at low prices could lead to significant wealth over the long run.

Risks

Clearly, investing in shares is not a risk-free event. Although the risks of doing so may be far lower than buying Bitcoin or gambling through The National Lottery, companies can go under and stock markets experience bear markets at regular intervals. That’s why it is crucial to ensure that as retirement moves closer, an investor takes less risk. This could be through investing in larger companies with higher yields and stronger balance sheets. Or it could even mean moving into bonds as retirement moves closer.

Either way, obtaining a more modest return over the long run could be a better means of generating wealth than seeking to make high returns in an instant. It may be less exciting, but has a track record of delivering success for a wide range of individuals over recent decades.

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