Becoming a stock market millionaire may seem like a lofty goal, but it is attainable -- with the right strategy. While there's not necessarily a right or wrong way to build wealth in the stock market, some approaches are safer (and more effective) than others. This is especially true during periods of market volatility, where your strategy can potentially make or break your portfolio.
Legendary investor Warren Buffett has offered many pieces of stock market advice over the years, but there's one fantastic tip that can make it far easier to build a million-dollar portfolio: Keep a long-term outlook.
A long-term outlook is key to investing success
There's no safe way to make a lot of money quickly in the stock market. But if you invest consistently over many years, it's not as hard as it may seem to accumulate $1 million or more.
Back in 2008, at the height of the Great Recession, Buffett wrote an opinion piece for The New York Times. In it, he explained some of the advantages of long-term investing.
Here's an excerpt:
A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful. ... [F]ears regarding the long-term prosperity of the nation's many sound companies make no sense. These businesses will indeed suffer earnings hiccups, as they always have. But most major companies will be setting new profit records 5, 10 and 20 years from now.
Image source: The Motley Fool.
He went on to explain that despite short-term volatility, the market had a long history of earning positive returns over time.
Over the long term, the stock market news will be good. In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11,497.
The path toward $1 million
History has proven time and time again that long-term investors have the best chances of seeing positive total returns. In fact, analysts at Crestmont Research examined the S&P 500's rolling 20-year total returns and found that over the past century, there was never necessarily a bad time to invest in an S&P 500 index fund. In every single 20-year period, the index earned positive total returns.
In other words, no matter when you had invested in an S&P 500 index fund, you'd have earned positive returns, as long as you held that investment for 20 years.
Even over the last two decades alone, despite experiencing some of the worst recessions and bear markets in history, the S&P 500 is still up by 210% since 2000. If you had invested in an S&P 500-tracking fund in 2000, you'd have more than tripled your money by today.
Hold onto your investments for even longer, and you could potentially earn far more.
For example, say you're investing in an S&P 500 index fund earning an average rate of return of 10% per year -- which is in line with the market's historic average returns. If you invest, say, $300 per month, here's approximately how much you could accumulate over time:
| Number of Years | Total Savings |
|---|---|
| 20 | $206,000 |
| 25 | $354,000 |
| 30 | $592,000 |
| 35 | $976,000 |
| 40 | $1,593,000 |
Data source: Author's calculations via Investor.gov.
In this scenario, it would take just over 35 years of consistent investing to reach $1 million. But if you're able to invest more per month (or give your money more time to grow), it will be easier to reach your goal.
Also, if you're investing in individual stocks or funds that are able to beat the market and earn above-average returns, you could potentially earn much more than these figures.
Regardless of your investing goals or how much you can afford to contribute each month, a long-term outlook is key to generating wealth in the stock market. Nobody knows what the market will do over the coming weeks or months, but its long-term potential is unquestionably strong.
