The stock market is one of the simplest and most effective tools for building wealth that lasts a lifetime, but there are many misconceptions when it comes to investing. Many people believe, for example, that you need to be wealthy to make a lot of money in the stock market or you must be a finance guru to build a solid portfolio. While those factors certainly don't hurt, they're not necessary to generate long-term wealth.
It's possible for the average investor to build a million-dollar portfolio with the right strategy. But there are three steps you'll need to take to get there.
Image source: Getty Images.
1. Start investing early
Time is your most valuable resource when it comes to making money in the stock market. Thanks to compound interest, your savings will grow exponentially the longer they have to accumulate.
Even if you can't afford to invest much at the moment, it's still better to get started now than to put it off. You can always increase your savings rate later but you can't get the time back.
2. Invest consistently
Consistency will not only make it easier to build investing into your monthly budget, but it can also help protect your portfolio against market volatility and save you money. When you invest a set amount on a regular schedule throughout the year, it's called dollar-cost averaging.
With this strategy, you're investing in the same stocks at various prices. Sometimes, you'll end up buying when the market is thriving and prices are high; other times, you'll snag those investments at steep discounts.
This takes the guesswork out of when to invest. Timing the market and trying to buy at the exact right moment is incredibly risky. And if your timing is off, it could be costly, too. By investing consistently, instead, you can limit that risk while still growing your portfolio.
3. Focus on buying quality companies
The companies behind the stocks you buy will make or break your portfolio. While short-term investments promising explosive growth can be tempting, you'll often lose more than you'll gain with these types of stocks.
A safer option, then, is to opt for stocks from quality companies with the potential for long-term growth. These businesses will have solid underlying fundamentals, such as healthy finances, a competitive advantage in the industry, and a capable leadership team.
Long-term investments are more likely to see slow but steady growth and won't make you rich overnight. But they are far less risky than their short-term counterparts and can help you make a lot of money over time.
Putting it all together
So what, exactly, does it take to accumulate $1 million in the stock market? It will depend largely on your specific investments, the returns you're earning, and your timeline. That said, it can be helpful to get a rough idea of how much you'd need to invest to reach millionaire status.
Historically, the stock market has earned an average annual return of around 10% per year. With the right stocks in your portfolio, however, it's possible to beat these returns quite substantially over time.
For simplicity's sake, let's assume your investments are earning a 10% average annual return. To reach $1 million, here's approximately how much you'd need to invest each month, depending on how many years you have to invest:
| Number of Years | Amount Invested per Month | Total Savings |
|---|---|---|
| 20 | $1,500 | $1.031 million |
| 25 | $850 | $1.003 million |
| 30 | $525 | $1.036 million |
| 35 | $325 | $1.057 million |
| 40 | $200 | $1.062 million |
Data source: Author's calculations via Investor.gov.
Your actual savings rate will depend on the returns you're earning on your investments. Also, these calculations assume you're starting from zero. if you've already begun investing and have some money accumulated, you have a head start -- so you won't need to invest as much per month.
Building a million-dollar portfolio isn't easy but is possible -- with the right strategy. By getting started now and choosing the right investments, you could earn more than you might think in the stock market.
