In earlier commentaries, we've shown just how easy it is to make a million bucks. Provided you've got the discipline to sock away the savings -- and the time to let compound interest work its magic -- you, too, can be a millionaire. Indeed, $500 plunked down monthly in a mere index tracker -- such as the dirt cheap SPDRs (SPY) exchange-traded fund -- will grow to a million bucks in just less than 28 years, if the market delivers its historical return of 10.5%.
But what if you want to shoot higher and amass, say, $2 million? Is that just a matter of time and gumption, too?
Not exactly. Needless to say, the bigger the goal, the more critical it is to get your plan right and spring into action posthaste. If you have the stomach for volatility and the wherewithal to put financial independence on the proverbial front burner, you can reach your lofty goals. Here's how.
Go growth
Value investing has been all the rage for so long now that it's hard to blame investors -- particularly newbies -- who have come to believe that it's destined to be that way forever. However, growth and value are relative terms, and these days, it's possible to snap up shares of stocks with double-digit earnings growth forecasts on the relative cheap. Morgan Stanley (NYSE:MS) and Merrill Lynch (NYSE:MER), for example, fit that profile, as do Washington Mutual and Devon Energy (NYSE:DVN): All clock in with price-to-earnings ratios below that of the broader market.
Add Lowe's (NYSE:LOW), Valero Energy (NYSE:VLO), and Abercrombie & Fitch (NYSE:ANF) to that list of apparent bargain-bin specials and then add up these numbers: Taken together for the 10 years that ended with July, these stocks have delivered an annualized average return of roughly 22.9%. Pick winners like that, and at a comparable rate of return, your journey to Two Millionaire Acres would take less than 20 years on the $500-a-month plan. Talk about making good time.
The Foolish bottom line
Make no mistake: It really is true that past performance is no guarantee of future results. The broad point, though, is well worth remembering: Greater risk -- in the form of stocks with earnings growth prospects that make 'em more susceptible to the market willies -- can lead to greater returns over the long haul.
What's more, there are ways of mitigating that risk. Mutual funds come to mind, as does assembling a portfolio that provides exposure to defensive, "capital preservation" plays along with racier growth stocks.
As it happens, we've covered all those investment types -- and made specific recommendations -- in Motley Fool Green Light, the investing and personal finance service designed with beginners -- and those playing catch-up -- in mind. In the April issue, for example, we served up tips for keeping the taxman at bay, advice for taking advantage of market volatility, and the skinny on trimming your airfare tab.
If that kind of comprehensive approach to your financial life sounds like your cup of tea, check out Motley Fool Green Light with a free 30-day guest pass.
This article was first published on March 8, 2007. It has been updated.
Shannon Zimmerman runs point on the Fool's Champion Funds newsletter service and co-advises Motley Fool Green Light with his pal, Dayana Yochim. At the time of publication, he didn't own any of the securities mentioned above. Washington Mutual is a Motley Fool Income Investor recommendation. You can check out the Fool's strict disclosure policy by clicking right here.
