I could write this article the usual way -- by showing you how to turn your thousands into millions through investments in solid, growing, well-known companies. Intel (NASDAQ:INTC), for example, has returned an average of 17% annually over the past 20 years, while Walgreen (NYSE:WAG) has averaged 15%. Not too shabby.
But can such returns turn your thousands into millions? Yes, eventually. An investment of merely $10,000 would turn into $1 million in 30 years if it grew at an annual average of 17%. But that's a fairly steep rate to count on for your stock investments -- a number to which only a select few master investors can aspire. It's safer to have more conservative expectations -- perhaps closer to 10%, the stock market's historical average annual return over most of the past century.
A fine balance
So, what should you do if you don't want to wait 50 or more years to make millions? Here's one option: Take a few chances.
With most of your money, you shouldn't take crazy risks. You might want to sock much of it away in a broad-market index fund, such as the Vanguard 500 Index (VFINX). That low-cost fund should earn you close to the market's historical return over long periods of time. You might also try S&P 500 Depositary Receipts, an exchange-traded fund also known as SPDRs. Either of these options will instantly invest your money in 500 major American companies, such as Microsoft (NASDAQ:MSFT) and Merck (NYSE:MRK).
But once you've done that, take a few chances and supplement your index with growth-stock picks. That's what I'm doing in my own investment account. I don't want all of my money in an index fund because I'd like my portfolio to grow faster than average. Instead, a chunk of my nest egg sits in a variety of individual stocks.
This strategy should help moderate volatility, and it can also allow you to do well with some carefully chosen stocks -- as it did for me when I turned $3,000 into $210,000. (It can also help you zero in on great stocks the Street misses.) If you don't believe me, read Fool Paul Elliott on how one stock can change everything. He describes how $1,800, the cost of a fancy TV, can turn into $190,000, the value of an entire home -- when you break some rules.
Aiming for the stars
Such returns, which come from classic Rule Breaking companies, are too tempting for me to ignore. That's why I'm still on the lookout for young, dynamic companies that are breaking the rules as they grow and prosper.
The kinds of companies I'm talking about are tomorrow's MasterCard (NYSE:MA), Automatic Data Processing (NYSE:ADP), and Comcast (NASDAQ:CMCSA). Think about how different the world was before them. We had to carry enough cash or checks to pay for whatever we wanted to buy, and we had to have the funds available. Companies had to prepare their own payroll and manage their own employee benefits, no matter the cost. Television was limited to just a few stations that you could pick up with your antenna.
Even Ford was a Rule Breaking company once, daring to make a luxury item available to the masses at an affordable price. Just try to imagine a world without cars.
Find a few rockets
Seeking out and investing in Rule Breakers requires patience and entails risk. However, just one growth rocket has the potential to supercharge an otherwise stodgy index strategy.
If you're interested in adding some turbo-boosters to your own portfolio, consider our Motley Fool Rule Breakers service, which you can try free for 30 days, including full access to all past issues and every previous recommendation. Headed by Fool co-founder David Gardner, Rule Breakers pays special attention to cutting-edge fields such as biotech, alternative energy, and nanotechnology. Check it out to learn more.
This article was originally published on July 7, 2006. It has been updated.
Longtime Fool contributor Selena Maranjian owns shares of an S&P 500 index fund. Microsoft and Intel are Motley Fool Inside Value picks. The Fool owns shares of Intel as well as covered calls on Intel. The Fool is investors writing for investors.
