Here's a secret. You don't have to be an expert investor to retire a millionaire. It does help, though, to master a few simple investment rules. Here are three you can pick up fast. They'll keep your expectations and emotions in check, and your portfolio well-rounded.
1. Rule of 72
The Rule of 72 is a quick formula to estimate how long it will take to double your savings. The math is pretty easy. Divide 72 by the average annual growth rate of your retirement portfolio. The answer is your portfolio's doubling time, in years. Most novice investors can use a growth rate of 6% or 7%, which is in line with the stock market's long-term average annual growth after inflation. Divide 72 by six and seven and you'll see that your invested dollars will double roughly every 10 or 12 years.
Use the Rule of 72 to reality-check your savings progress. If you have $100,000 on hand, it has to double more than three times before you cross the millionaire mark. That could take 35 or 40 years, assuming you make no additional contributions. If you don't have 35 or 40 years before retirement, lean into those contributions -- and use the Rule of 72 to help your planning. Say you plan to contribute $10,000 to your retirement account in 2021. Those contributions should double to $20,000 in ten years and double again to $40,000 by the end of 2041.
This rule also demonstrates the power of time in investing. Start saving when you're 30 and you'll benefit from at least three doubling cycles. Wait 10 years and you miss out on a full doubling cycle. That could be the difference between saving $500,000 and saving $1 million.
2. Buy low, sell high
Buy low and sell high is the basic formula for profit-making. The concept seems simple enough, but many investors do just the opposite.
Here's how it happens. Say you own a fund that's priced at $100 per share. The market starts to show volatility and your fund's share price falters. It falls to $95, $91, $83, and so on. It reaches $70 and you scream uncle and sell. You've capped your losses at 30%. But now what? You'll probably wait until you're certain the market has stabilized before you reinvest. But by the time that happens, your fund's share price will certainly be higher than when you sold. Maybe you buy back in at $105, for example. At that point, you've secured a 30% loss on the shares you sold and paid a 5% premium when you got back in. That's selling low and buying high.
The simplest way to avoid all that is to stay in the market through tough times. It takes some emotional fortitude, but it's worth it in the long run.
Admittedly, you may have to adjust your mindset slightly when the market's rising. This is because it's hard to evaluate in the moment what's low and what's high. You might have thought Tesla was overpriced last January, for example. At that time, the stock was trading around $450 per share. But now that the electric carmaker trades at nearly $700 a share -- after a five-for-one stock split that effectively turned that initial $450 price into the equivalent of $90 per "new" share -- the January price seems like a steal.
If you get too hung up on buying low, you could miss out on opportunities. Keep yourself in the game by remembering that winners win. In other words, your best-performers should continue to do well in bull markets.
3. Rule of 110
The Rule of 110 helps you select an appropriate mix of investments for your age. All you have to do is subtract your age from 110. The answer is the percentage of equities you should hold in your portfolio. If you're 45, for example, it's appropriate to maintain a retirement portfolio that's 65% equities and 35% fixed income.
This rule is based on the best practice of reducing your investment risk as you get older. Equities have higher growth potential, but also more risk than fixed-income securities. As a younger saver, you can accept that trade-off. You'll benefit from the growth plus you have time to recover from any market turbulence. But as you get older, too much risk can be problematic. You don't want to see your portfolio balance swing wildly just as you are about to leave the workforce. That's why the Rule of 110 recommends gradually lower equity exposure as you get older.
Said another way, the Rule of 110 helps you reach millionaire status with a growth focus in your earlier years. It also helps you keep millionaire status by promoting stability in your later years.
Disciplined investing over time
Whether you're an expert stock picker or a novice fund buyer, it takes disciplined investing over time to amass a seven-figure retirement account. Make time your ally by investing early and often, stay invested through good times and bad, and manage your risk through diversification across equities and fixed income. Learn to live by those three investment rules and you're on your way to retiring a millionaire.