Many investors dream of being able to make a million in the stock market, but many fail to reach this lofty goal. Unfortunately, those investors make a few critical mistakes in their investing careers, which damage returns and hold them back.
So today, I’m going to explain my three tips to help you avoid making these crucial mistakes and put you firmly on the path to making a million.
The sooner, the better
My first tip is to start saving as soon as possible. Many investors make the mistake of delaying saving until later life, which is the worst possible decision you can make.
Time is the most significant tool investors have available to them to generate wealth because it allows the power of compound interest — which Albert Einstein once labelled as the eighth wonder of the world — to work its magic.
To give a quick example, a person investing £10 a month for 50 years at an annual interest rate of 5% would build a savings pot worth £26,330 after those five decades of saving. To reach the same endpoint in 25 years, at the same annual return rate of 5%, this person would have to save three-and-a-half times more every month. So, even if you don’t have much to save, it pays to start putting away whatever you can as soon as you can.
Slow and steady
Compound interest is a fantastic tool over the long term, but you can’t rush it. It will get you there, but you have to be patient and not take excessive risks to try and accelerate wealth creation. If you do, you could end up losing money, and this will almost certainly throw you off track.
There’s plenty of research which shows that most investors struggle to outperform underlying stock market indexes. This being the case, I believe the best way for most investors to reach a million is to invest in a low-cost tracker fund.
Indeed, according to my research, over the past decade, the FTSE 100 has produced an average annual return for investors in the region of 8%. At this rate of return, all you need to do is invest £200 a month for 45 years to hit the £1m target.
What’s more, by using this approach, all you need to do is make sure you’re saving enough every month and not tinkering with your portfolio. There’s no extra effort required on your part.
Too good to be true
Warren Buffett, who’s widely considered to be the world’s greatest investor, believes good investing is boring, and I think he’s right. As I’ve highlighted above, investors don’t need to take lots of risks or spend hours researching stocks to become wealthy if they start saving early and have a strict savings plan in place.
This also means investors need to avoid chasing opportunities that look too good to be true, because they almost certainly are.
These opportunities might look attractive but, as I’ve said above, you don’t need to take a lot of risk to make a lot of money over the long term. If you do, you’ll open yourself up to losses, which could be a significant setback.
It's easy to make a million by using a simple strategy such as tracking the FTSE 100 and letting your money work for you. Unfortunately, most investors 'over-trade' and, as a result, their returns suffer significantly...
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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.