Many investors dream of building a $1 million portfolio. Often, they think all they need is one great stock pick and go searching for diamonds in the rough and undervalued opportunities every month.
It's true that many millionaires have been minted with small four- or five-figure investments in companies before their stock prices soared. For example, a $5,000 investment in Nvidia a decade ago is now worth well over $1 million.
But you don't have to find the next Nvidia to become a millionaire. There's a much simpler path to reach that goal -- by investing in a single exchange-traded fund (ETF) every month, instead of searching for moonshots. Here's how this simple strategy can turn your monthly investments into $1 million.
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Consistency can pay off
The simplest and most effective strategy to build a $1 million portfolio isn't to try to find the next great growth stock. While you might hear stories from a friend or in-law about how they made a killing by investing in Nvidia, Tesla, or Palantir Technologies, you don't hear the stories about how they lost a ton of cash by investing in the stocks nobody's ever heard of. While one big winner can outweigh a lot of losers, a more consistent path toward $1 million is far more preferable.
That's why you should consider buying the Vanguard S&P 500 ETF (VOO +0.55%). It won't offer you any great stories to tell at parties, but it will offer you returns that closely track the benchmark index used by stock market professionals and party guests alike.
That's pretty good.
In fact, most professional fund managers struggle to match the S&P 500 over the long run when you factor in their fees. Roughly 86% fell short of the benchmark over the last five years, according to S&P Global, and the numbers get worse if you look at after-tax and risk-adjusted returns. The numbers are also worse for growth investors and their relative benchmarks across large-cap, mid-cap, and small-cap stocks.
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Key Data Points
While individual investors have some unique advantages over professional fund managers, they also have some serious disadvantages. They lack a research staff to provide them with data and analysis to inform their decisions. They probably don't have an extra 60 hours per week to dedicate to managing a portfolio, either. In other words, it's possible to beat the market, but it's really hard.
But if your goal is to create a portfolio worth $1 million, you don't need to outperform the market. You just need to invest consistently month after month. In fact, if instead of buying $5,000 worth of Nvidia in January 2016, you'd bought the Vanguard S&P 500 ETF, you'd have $21,000 in your portfolio. But if you continued to add $5,000 to the ETF every month, you'd have over $1.3 million in your portfolio today. Granted, not everyone has $5,000 per month to invest in the stock market, but you can still become a millionaire with much smaller investments and enough time.
How long to become a millionaire?
Unless you have a time machine, nobody can tell you exactly how long it will take you to reach millionaire status. But we can use historical data to provide rough estimates of how long it will take based on the amount you can invest each month.
The S&P 500 has a historical average annualized total return of about 10.5% over the last century. That's probably the best guess we have about how much the index will grow over the next century. Importantly, the longer your time horizon, the more likely the index is to match expected returns. The stock market is notably more volatile than many other financial markets, which means short-term returns can differ widely from the average.
The following table provides an estimate of the time required to build a $1 million portfolio from scratch by investing solely in the Vanguard S&P 500 ETF each month.
| Monthly Investment | Estimated Time to $1 Million |
|---|---|
| $500 | 29 years and 9 months |
| $1,000 | 22 years and 4 months |
| $2,000 | 16 years and 5 months |
| $3,000 | 13 years and 4 months |
| $4,000 | 11 years and 3 months |
| $5,000 | 9 years and 10 months |
Calculations by the author.
Several key points are worth noting regarding the table above.
First, you'll notice that doubling your investment every month doesn't halve your time to millionaire status. That's because a significant portion of building a million-dollar portfolio involves compounding your investment over time. The amount you contribute has less of an effect compared to the amount of time you remain invested. That's especially true for smaller monthly investment amounts and longer investment horizons.
Second, as mentioned, volatility can have a significant impact on your actual results. Consistently investing in the ETF, whether the market pushes its price higher or lower each month, will smooth out the results. However, a poor sequence of returns can significantly extend those estimated timelines. The shorter your estimated time frame, the more likely you are to have to adjust based on market fluctuations.
Lastly, the annualized 10.5% return doesn't account for inflation. A $1 million investment won't have the same buying power in the future as it does today. You can adjust for this by increasing your monthly investment each month, or simply lowering your return expectations and investing for a longer period.
But if you want a simple way to build a million-dollar portfolio, you don't need to buy the latest "can't-miss" growth stock. Consistently investing in a boring ETF will do the job just fine.
