How to Build a $100,000 Portfolio -- or an Even Bigger One

There's a good chance that the thought of having a $100,000 portfolio -- or a bigger one -- will make you laugh, sorrowfully. After all, nearly half of Americans have saved precisely nothing for retirement according to a 2019 report by the U.S. Government Accountability Office, based on 2016 data.

It's very likely much easier than you think to amass a sizable retirement war chest, unless you're just few years from retiring. (Even then, though, there are some productive moves you could make.) Here's a look at how you might move beyond a money market or savings account with low interest rates and get invested in stocks, which tend to offer higher returns. Even if you've already saved a lot, you can probably increase your wealth further -- perhaps even becoming a millionaire.

Here's a guide to vastly improving your future financial security.

Image source: Getty Images.

Your soon-to-be $100,000 portfolio will likely consist of some or all of these investments:

1. Index funds
2. Managed mutual funds
3. Individual stocks
4. Dividend-paying stocks

You can do it!

Let's start with a pep talk, because you might be assuming that attaining a $100,000 (or larger) portfolio is simply out of reach for you. As long as you have some time, though, it is attainable. The table below shows how annual investments of only $1,000 can get you there -- and how investments of more annually will get you there faster:

Source: Calculations by author.

An 8% growth rate was used in order to be somewhat conservative, as the stock market's long-term annual growth rate over many decade has been close to 10%. Still, the average growth rate over your investment period could be greater or lower than 8%.

Proof that it can be done

In case you're doubting that ordinary people can amass millions, here are some of many examples out there:

• Eva Gordon: She never went to college, and worked as a legal secretary and trading assistant. (Her husband was a stockbroker.) Ms. Gordon was an early investor in companies such as Nordstrom, Microsoft, and Starbucks, and when she passed away, she was able to bequeath close to $10 million to 17 community colleges.
• Genesio Morlacci: A part-time janitor and dry cleaner, he saved and invested and upon his death, left $2.3 million to the University of Great Falls in Montana.
• Sylvia Bloom: She was a secretary at a law firm for 67 years, and when her boss placed stock trade orders, she did the same, with lesser amounts. Still, she died worth more than $8 million.
• Jay Jensen: Mr. Jensen worked as a teacher, lived frugally, and was a steady investor in blue-chip stocks for decades. He never earned more than $47,000, but was worth several million dollars at his death.

Some of things that many of these folks had in common were living relatively frugally, investing in stocks over decades, and being patient. You might not have 67 years in which to invest, but you may still amass millions, if you can sock away some meaningful sums over lots of years. The table below offers a little inspiration:

Source: Calculations by author.

Image source: Getty Images.

Shoot for more than $100,000 -- maybe even a million-dollar portfolio

Don't dismiss the big numbers in the table above: Most likely, some are better goals for you than a mere $100,000, because you'll probably need more than that to generate enough retirement income for a comfortable future. Applying the flawed-but-still-helpful 4% rule offers a rough idea of how much retirement income a $100,000 portfolio will generate: The rule suggests you withdraw 4% of your nest egg in your first year of retirement and then adjust future years' withdrawals for inflation. So... 4% of $100,000 is $4,000 -- that's just $333 per month.

When it comes to how big a nest egg you'll need for retirement, there's no one-size-fits-all amount. Many people suggest $1 million, which will generate $40,000 in your first year of retirement with the 4% rule -- or $3,333 per month. But that might be too much or too little for you.

How much do you need for retirement?

To determine how much money you need for retirement, spend a little time estimating what income you'll need in your golden years. If you look up what experts suggest, you'll see numbers ranging from 40% to 80% or more of your pre-retirement income. That's a big, and mostly unhelpful, range. So take some paper and a pencil, and start estimating what your expenses are likely to be in retirement. Be as comprehensive as possible, including housing, taxes, insurance, food, clothing, transportation, entertainment, utilities, gifts, travel, hobbies, and so on. Don't forget healthcare expenses, either, as they're likely to be substantial.

Eventually, you'll arrive at your desired total annual retirement income. Now consider your expected income sources. Social Security is likely to be one, for example. The average monthly Social Security retirement benefit was $1,478, or about $17,700 annually. (Those who earned more than average in their working lives will collect more than that, but the maximum for someone retiring at their full retirement age in 2019 was $2,861 per month, or $34,332 per year.) Will you be receiving any pension or annuity income? Factor that in, too.

Let's say that you determine you'll need $60,000 in annual income upon retirement, and that you're expecting $30,000 from Social Security. and you have no other income other than what you can get from your retirement investment accounts, you're looking at a shortfall of $30,000. Take that 4% rule (or whatever percentage you plan to withdraw from your nest egg) and invert it -- by dividing 100 by it. Dividing 100 by 4 gives you 25. So multiply the $30,000 shortfall by 25 and you'll get $750,000. That's the size of the nest egg you'll need, in order to withdraw 4% and get $30,000.

Are you ready to build your $100,000 (or bigger) portfolio?

Before you jump into building your big portfolio through investments, take a moment to make sure you're really ready to invest. For starters, are you carrying any high-interest rate debt, such as from credit cards? If so, you need to pay that off first. (Fortunately, it's possible to get out of debt from even huge burdens.)

Next, do you have an emergency fund, stocked with around six to nine months' worth of living expenses? Be sure you do, or be sure to know how you'll manage if you're suddenly out of work for some months or face a major expense, such as a new transmission for your car or costly surgery for yourself.

Image source: Getty Images.

For long-term wealth building, look to the stock market

Once you're ready to start building wealth, the stock market is where your money is likely to grow the most briskly, as stocks tend to outperform alternatives over long periods. Indeed, stocks outperformed bonds in 96% of all 20-year holding periods between 1871 and 2012 and in 99% of all 30-year holding periods, according to Wharton Business School professor Jeremy Siegel.

Siegel calculated the average returns for stocks, bonds, bills, gold, and the dollar, from 1802 to 2012:

Source: Stocks for the Long Run.

The following table takes those annualized returns from the table above, and looks at how an annual investment of $10,000 would grow at those rates over time:

By the way, over a shorter period, from 1926 to 2012, Siegel found that stocks grew at an average annual rate of 9.6%, vs. 5.7% for long-term government bonds.

Make the most of retirement accounts

As you save and invest, consider doing so using tax-advantaged retirement accounts such as IRAs and 401(k)s, at least to some degree. Here are key things to know:

• Both IRAs and 401(k)s come in traditional and Roth varieties. With traditional accounts, you contribute money on a pre-tax basis, shrinking your taxable income by the amount of your contribution and thereby shrinking your tax bill. With Roth accounts, you contribute post-tax dollars and receive no upfront tax break. But if you follow the rules, you can eventually withdraw money from the accounts tax-free -- which can be a big deal, if the account has grown large.
• IRAs offer the widest range of possible investments. If you open an IRA with a good brokerage, you can invest that money in just about any stock and gobs of mutual funds. Meanwhile, 401(k)s typically offer a limited range of funds in which you can park your dollars.
• For 2020, you can contribute up to $6,000, total, to one or more IRAs, plus an additional $1,000 if you're 50 or older. The contribution limits for 401(k)s are far more generous: For 2020, you can sock away up to $19,500, plus an additional $6,500 for those 50 and older, totaling $26,000.

Open a brokerage account

If you don't have a brokerage account in which to be buying and selling stocks, you'll need to open one. Read up on the best brokerages and how to open a brokerage account before rushing into brokerage you see advertised.

In a nutshell, you can open an account online or by visiting a brick-and-mortar brokerage office. You'll need to fill out a little paperwork and deposit some money to start investing with. Some brokerages have minimum initial investment amounts, and others don't. Whereas each buy or sell order you place used to cost up to $100 or more just for the transaction, those commission fees have fallen over several decades now, and many brokerages are currently offering free trading.

Image source: Getty Images.

These investments will help you build a $100,000 (or greater) portfolio

So now that you're ready to start building wealth -- or to build it with more determination, perhaps aiming for faster growth -- it's time to review the kinds of investments you should consider.

At a minimum, steer clear of the ways to lose money in the stock market, such as through penny stocks, investing on margin, and trying to time the market. But better than that, keep learning about smart investing approaches and about the best investors such as Warren Buffett, too.

Four great kinds of investments to learn about and consider are: index funds, managed mutual funds, individual stocks, and dividend-paying stocks. Here's a deeper dive into each:

No. 1: Index funds

It's hard to go wrong with low-fee index funds that track a broad stock market index, as they'll deliver returns very close to the performance of the overall stock market. Even Warren Buffett has recommended them, suggesting investors "consistently buy an S&P 500 low-cost index fund... I think it's the thing that makes the most sense practically all of the time."

Don't think that you'll be dooming yourself to sub-par growth with index funds, either. (By definition, you'll be earning par returns!) Index funds have actually outperformed their more actively managed counterparts over long periods: Indeed, as of the middle of 2019, over the past 15 years, fully 90% of large-cap stock funds underperformed the S&P 500. So consider favoring low-fee, broad-market index funds, such as ones that track the S&P 500.

Below are a few good index funds to consider, including one that tracks the bond market. These are technically exchange-traded funds (ETFs), too, which mean they're mutual-fund-like creatures that trade like stocks, letting you buy as little as a single share at a time.

• The SPDR S&P 500 ETF (SPY): This fund tracks the S&P 500 index of 500 of America's biggest companies. It's often used as a proxy for the overall U.S. market, which isn't a stretch, as its holdings make up about 80% of the total value of the U.S. stock market.
• The Vanguard Total Stock Market ETF (VTI): This fund encompasses all of the U.S. stock market, including the many smaller companies not in the S&P 500.
• The Vanguard Total World Stock ETF (VT): This fund tracks the whole world's stock markets, including the U.S. market.
• The Vanguard Total Bond Market ETF (BND): This fund tracks the overall bond market, holding mostly medium-term bonds and ones backed by the U.S. government, but also including corporate and other bonds.

While many actively managed mutual funds charge annual fees ("expense ratios") of 1% or 1.5% or more, it's easy to find index funds charging 0.25% or 0.10% or less. That kind of difference can save you a lot of money.

If you simply (and regularly) plunk your money into low-fee, broad-market index funds and do so for many years, if not decades, you're likely to see your money grow at a good rate -- with extremely little effort on your part.

No. 2: Managed mutual funds

While index funds are considered "passively managed" because their managers don't have to analyze stocks and decide what to buy, actively managed mutual funds feature just that: professional money managers who continually scour the markets for promising investments and who decide what to invest in and when, and also when to sell various holdings. For all this work, they charge annual fees.

Remember that the vast majority of managed funds underperform simple index funds, so it really does make plenty of sense to just stick with index funds. But if you want to try to find and invest in the best mutual funds, ones that may serve you better than index funds, give it a try. (If you fail over a few years, you can move your money into index funds.) You'll need to research many funds; look for low fees, no sales load, managers who have been with the fund for a while and who have good track records and philosophies you agree with.

Understand that mutual funds often have a focus. Some are trying to achieve the best growth ("growth" funds), others are seeking income from dividends and interest ("income" funds), and some feature both stocks and bonds ("balanced" funds). The words "fixed-income" typically refer to bonds, while "equity" refers to stocks. "Large-cap," "mid-cap," and "small-cap" funds will, respectively, focus on companies with large, medium, and small market capitalizations, or market values. Some funds will focus on a geographical region, such as Europe, Asia, or emerging markets, while others will focus on certain industries (software, financial companies, healthcare, etc.). (Remember that broad-market indexes can include most industries, company sizes, and even geographic regions.)

Image source: Getty Images.

No. 3: Individual stocks

Investing in individual stocks gives you a chance at really great returns -- but it can be much riskier, too. You can reduce your risk somewhat by spreading your money across 10 to 20 or so stocks, and you can combine investments in individual stocks with ones in index funds, too. You'll want to learn a lot about investing and to keep learning, as well.

As you'll come to appreciate, you shouldn't invest in any company until:

• You understand how it makes its money, in detail. (That's its "business model," and it can range from making and selling things in its stores to processing payments online via technology to licensing its name for others to use.)
• You know its business well -- all the products and services it offers, and those of its competitors.
• You understand its competitive advantages, such as scale, or a strong brand, or a network that rivals would have trouble duplicating.
• You've read lots of articles and opinions about it, not just from those who admire it.
• You've read its financial statements and have a grasp of its financial health -- its debt levels, it cash levels, its growth rates, profit margins, and so on.
• You know why you're buying it and when you'd sell it.
• You plan to keep up with its progress, by following it in the news and reading its quarterly and annual reports.

To get an idea of how some familiar names have performed over time, check out the table below, which also shows how the S&P 500 performed over the same period:

Source: theonlineinvestor.com; author calculations, with dividends reinvested.

No. 4: Dividend-paying stocks

Among the stocks in which you invest, it's smart to include dividend-paying stocks. Why? Well, because they offer you not only the prospect of their share price increasing over time, but they'll also pay you cash regularly, as long as they remain healthy. Better still, even the best companies go through slumps on occasion and see their shares sag -- but they will usually still keep paying out those dividends, even increasing their payouts over the years.

Imagine, for example, one day having a $400,000 portfolio of dividend payers, with an average dividend yield of 3%. (A company's dividend yield is the amount of its total annual dividends divided by its current stock price.) That will kick out $12,000 per year to -- about $1,000 per month. If you're in retirement and need income, it's income that doesn't shrink your portfolio via the sale of any stocks. If you don't need income for a while, you can invest that money in more shares of stock.

The table below offers an idea of the kinds of dividend yields you can find from familiar names. (Of course, they will rise or fall over time, as the stock prices, respectively, fall and rise.)

Source: Yahoo! Financial.

Regarding these four types of investments, remember that you don't have to choose only one: You might invest in a mix of index funds, managed mutual funds, dividend-paying stocks, and non-dividend-paying stocks.

Armed with the information and guidance above, you can now take steps toward building a portfolio of $100,000 or more -- perhaps by first paying off your high-interest rate debt or by opening a brokerage account to establish an IRA. For best results, keep reading and learning. Fool.com is a great place to start, as are some good financial books.