Making a million pounds in the stock market might seem like a distant dream. However, I believe that you don’t need to be a stock market genius to hit this lofty target. All you need to do is save and invest sensibly.
Here are my three tips to help any investor do just that.
The first stage of this journey is to set up a savings plan. Sit down and work out how much you can afford to save every month and how this will add up over the long term.
You need to be sure that you are saving what you can afford, and not putting yourself in a precarious financial situation by saving more than you should be. Saving a lot might seem like a sensible decision, but if you have to turn around and withdraw money to pay off debts at a later date, it can erase months or years of hard work.
When you know how much you can save every month, make sure you put the money away as soon as possible, so there is no temptation to spend it.
My next tip is to open an ISA, LISA or SIPP. All of these products have different features and benefits, but the one big benefit is that they all offer tax efficiency.
Any money saved in an ISA, LISA or SIPP is not subject to tax on further income or capital gains, that makes them the perfect place to save for the future without having to give more money away to the taxman.
Let the market do the work
My final tip for making £1m in the stock market is to let the market do the work for you.
Picking stocks can be a time-consuming and risky process. If you are trying to make a million, you need to be sure that all of your money is being invested sensibly, with little chance of a permanent capital loss.
The best way to do this is to pick a low-cost passive index tracker fund. These funds track their underlying index and do not rely on a manager’s skill to pick individual stocks.
Tracking an index such as the FTSE 100 or FTSE 250 is, in my opinion, the best way to invest in a market with as little effort as possible. Research shows that over the long term, most investment managers underperform their benchmark index, so this suggests that investing in a passive index tracker will also give you better returns over the long term as well.
Charges also tend to be lower, allowing you to keep more of your hard-earned money.
Putting it all together
According to my research, over the past 10 years, the FTSE 250 has produced an average annual return for investors in the region of 9%. At that rate of return, I calculate an investor would need to put away £500 a month for 31 years to make a million.
So, what are you waiting for? The best time to start saving for your future is now.
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.