It's not such a pipe dream, really. If you want to be rich, you have a good chance of attaining wealth -- as long as you don't have one foot in the grave. Increasing your nest egg's value is simply a matter of earning a decent growth rate over a designated period of time:
- Growing at 10% per year, on average, a tenfold increase will take a little less than 25 years.
- Growing at 12% per year, on average, it will take a little more than 20 years.
- Growing at 14% per year, on average, it will take a little less than 18 years.
- Growing at 17% per year, on average, it will take a little less than 15 years.
Those combinations will turn a modest nest egg of $30,000 into $300,000, a heftier one of $250,000 into $2.5 million, and a $500,000 one into $5 million. Not bad, eh?
But wait ...
The numbers above are still a little unrealistic, though -- because they deal with just one initial lump-sum investment. Odds are, you'll be willing and able to keep adding to your nest egg each year from your ongoing income. If so, here are some improved numbers:
- Start with $50,000, add $5,000 per year, and if it all grows at 10% per year, you'll pass the $500,000 mark in 18 years (not the 25 above).
- Start with $100,000, add $6,000 per year, and if it all grows at 12% per year, you'll end up with $1 million in 18 years (not the 20 above).
- Start with $200,000, add $10,000 per year, and if it all grows at 14% per year, you'll end up with $2 million in around 15 years (not the 18 above).
Now that you have this info, how can you put it to work? Start by assessing your investments. Is your money invested in places where it's likely to grow at a good clip over the long haul? I don't expect you to sell everything and park it all in a stock that exploded in value over the past few years, because:
- That stock might be done exploding,
- It will leave you severely underdiversified, and
- There are smarter things to do.
Instead, read up on investing to figure out what kinds of investments appeal to you -- preferably ones chosen because of their expected returns and the risks they carry. You might, for example, decide to carefully pick a dozen strong and growing companies with undervalued stock prices and invest in them. Not all will be home runs, but just a few can really turbocharge your portfolio. Over the past 20 years, shares of Home Depot have averaged a 23% annual return, while Wrigley averaged 17% and Citigroup averaged 17%. Remember that you don't have to shoot for the stars, either. A market average return of 10% over the long run is enough to increase your nest egg's value tenfold -- probably well within your lifetime.
Personally, I've been shifting a lot of my nest egg into mutual funds recently, realizing that I'm probably better off having smarter investors than myself allocating my money. For example, I'm invested in the Dodge & Cox Stock (DODGX) fund, which has racked up an annual average gain of more than 17% over the past five years. It recently included the following among its top holdings: Hewlett Packard
That fund is currently closed to new investors, but another fund I own, the Oakmark Select I (OAKLX) fund, has averaged 15% gains over the past decade, and includes among its top holdings Washington Mutual
I've found a lot of funds with strong track records and great promise (plus low fees and no loads) via our Motley Fool Champion Funds newsletter. I invite you to test-drive the newsletter yourself for free for a whole month. You'll have full access to every single issue, so you'll be able to read about and check up on the performance of every recommended fund. There's no obligation, so why not see for yourself?
This article was originally published on Jan. 4, 2007. It has been updated.
Longtime Fool contributor Selena Maranjian owns shares of no company mentioned in this article. Gap, Home Depot, and Western Union are Motley Fool Inside Value recommendations. FedEx and Gap are Stock Advisor recommendations. Washington Mutual and Wrigley are Income Investor recommendations. The Motley Fool is Fools writing for Fools.
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