If you added $6,000 to an investment account each year, you could have over $1 million at the end of 30 years. But accumulating this amount of money would take more than just saving.
And investing would be crucial for your success. Implementing this simple investment strategy could make you a millionaire, and being mindful of these three things will help.
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Consistency
The more consistently you save and invest your money, the more you could see your accounts grow. And if you're planning on accumulating $1 million, reaching this goal could depend on how well you stick with your plan.
For example, if you discover that you could become a millionaire in 30 years by saving $6,000 each year and earning 10%, that number gets reduced to $650,000 if you start five years late and save for only 25 of them. If the rate of return that you earn deviates from 10% and you make an average of only 7%, your accounts could grow to only $600,000. This could happen if the money you saved doesn't get invested, or if attempts at market timing result in your missing out on important positive stock market days.
There are things beyond your control that may prevent you from being consistent, like an unexpected expense. But even in that scenario, adding what you can instead of nothing could get you closer to $1 million. Earning 10% a year on average would involve investing 100% in large-cap stocks. And leaving your holdings invested for the long term instead of constantly trading could help you achieve rates of return similar to the averages of indexes like the S&P 500.
Your risk tolerance
The more exposure to stock you have, the more your investments could grow. But that exposure is not without risk, and the more aggressively your accounts are invested, the more volatile they could be. And while they'll have a higher average rate of return, the best and worst years of performance will be more drastic than with a more conservative portfolio. Over the last 20 years, large-cap stocks have risen as much as 32% in a year and fallen as much as 37%, but U.S. bonds have see top gains of 10% versus maximum losses of just 2%.
Leaving your money invested in stocks for 30 years and getting better returns may seem like a great idea, but it could have big consequences. In 2008, if you were invested in large-cap stocks, you would've seen your accounts lose 37% of their value by the end of the year. If you were years away from retiring and kept it invested, you would've regained everything within four years. But if you were retiring in the next year, this could've affected your plans. And you might have ended up either pushing out your retirement date or reducing your expenses to accommodate your lower balance.
This is why the closer you get to retiring, the more sense reducing your stock exposure may make. Avoiding losses altogether may be impossible, but by doing this you can greatly decrease them. And in 2008 a more diversified portfolio that consisted of 50% U.S. bonds and 50% stocks would've lost only 16%..
Past performance
When you predict how your accounts will grow, you're using estimates of how the stock market has grown in the past. These projections have been pretty good indicators so far, but there are no guarantees that they will continue. And from year to year, those numbers vary greatly, as they did between 2000 and 2010, when the average rate of return you would've received from investing in the S&P 500 was only 2.5%.
That's why when you're using past performance as a guideline, you should do so with long-term investing in mind. And the longer the period you use, the more you should see those averages mirror your projections. When you extend that period to 20 years, between 2000 and 2020, the average rate of return rose to 8.2%. And for the 30 years between 1990 and 2020, the average rate of return was 11.7%.
Growing your accounts to $1 million doesn't have to be a complicated process. Saving is probably not enough. But with time and the stock market, it's attainable. Understanding how much you will need each year, the rate of return you could possibly receive, and being as consistent as possible can aid you with reaching this goal.
