While it is possible to make a million in a short space of time, the chances of doing so are relatively low.
The odds of winning the National Lottery, for example, are around one in 45m. Similarly, the average return on Premium Bonds is 1.4% at the present time, while the risk of loss from buying assets such as Bitcoin is significant. Indeed, the virtual currency’s price level declined by over 80% during 2018 after reaching a record high in December 2017.
Stock market potential
By contrast, the stock market has a long history of generating high returns for investors. For example, the FTSE 100 started life at 1,000 points in January 1984. It now trades at over 7,000 points, while it has also paid rising dividends during that time that have generally increased at a faster pace than inflation.
Similarly, the FTSE 250 has a strong track record of growth. Over the last 20 years it has delivered a total annualised return that is in excess of 9%. While this is unlikely to produce a £1m portfolio in the short run, the impact of compounding in the long run could mean that even modest investments in mid-cap shares lead to a significant nest egg.
Beating the index
While indexes such as the FTSE 100 and FTSE 250 have strong track records of growth, investors may be able to outperform them over the long run. For example, buying undervalued shares during periods of stress for the wider industry or economy could allow an investor to buy low and sell high. Likewise, focusing on a specific geographical area or theme, for example emerging markets, may provide an investor with access to a higher growth rate than the rest of the stock market can access.
Of course, history shows that the best time to buy shares can be during periods of uncertainty, when other investors adopt a cautious mentality. It could be argued that such a situation is present right now, with Brexit fears and concerns about a global trade war driving the market valuations of a wide variety of stocks lower. While there may be more uncertainty ahead, over the coming years undervalued stocks could deliver successful turnarounds.
As with the lottery, Premium Bonds and Bitcoin, there are risks involved in investing in the stock market. Any company can experience financial difficulties that lead to a falling share price.
However, through diversifying across a range of stocks, sectors and geographies it is possible to mitigate this risk to a large extent. Equally, adopting a mentality that focuses on the long-term growth prospects for a business and its shares, rather than attempting to generate high returns in a short space of time, may be a better means of generating wealth.
As ever, this strategy may take time to produce the returns investors are aiming for. But it could prove to be the most logical and worthwhile means of making a million.
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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.