There are few guarantees in life, but there are strategies that tend to lead to success. For example, if you're looking to turn $100,000 into $1 million, there are three strategies to remember:
- Start early
- Make regular contributions
- Diversify
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1. Start early (if you still can)
Ultimately, your portfolio will depend on compound interest to swell to $1 million. As opposed to simple interest, compound interest is calculated on the principal plus all previously accumulated interest. In other words, compounding pays interest on interest.
The earlier you begin investing, the more time compound interest has to work its magic. Imagine that you invest $100,000 into a traditional IRA and faithfully add $1,000 each month. Your goal is to retire at age 67. This table illustrates how much the starting age can affect returns, even when the annual rate of return is the same.
|
Age |
Years of Compounding Interest |
6% Average Rate of Return |
7% Average Rate of Return |
8% Average Rate of Return |
|---|---|---|---|---|
|
20 |
47 |
$4,439,775 |
$6,355,263 |
$9,158,003 |
|
30 |
37 |
$2,390,826 |
$3,146,411 |
$4,161,406 |
|
40 |
27 |
$1,246,704 |
$1,515,193 |
$1,847,015 |
|
50 |
17 |
$607,832 |
$685,964 |
$775,005 |
|
60 |
7 |
$251,089 |
$264,426 |
$278,456 |
Data source: Author's calculations.
If you're hitting middle age and have never been in a position to invest, it's not too late to begin. The point is to build a nest egg, even if it's not worth millions of dollars. Any money you take into retirement with you can only make life easier.
2. Make regular contributions
Treat retirement contributions like you would any other expense, but pay yourself first. Don't wait to see how much money you have left at the end of the month, because chances are, there won't be as much as you hope. Life has a funny way of siphoning money when you're not looking.
As you create a monthly budget, build it around your desire to live comfortably in retirement. And that means making regular contributions. It doesn't matter whether you make them weekly or monthly. You're more likely to stick with a contribution schedule that accommodates your lifestyle.
3. Diversify
If you recall a parent warning you not to put all your eggs in one basket, Mom or Dad knew what they were talking about. There are few things more important than diversifying your portfolio, so if one sector goes into the toilet, you have plenty of other investments to keep you afloat.
Over time, diversification has proven its worth. During the 2008-2009 bear market, investments lost value left and right -- all around the same time. However, diversified portfolios lost less. Diversifying helped manage risks. What's more, it helped provide exposure to growth as the market rebounded.
There is no formula for the "perfectly balanced" portfolio. The specifics come down to what will work for you. However, these tips provide a foundation for finding the balance you're looking for.
Diversify across asset classes
A well-balanced portfolio generally includes a mixture of stocks, bonds, cash, cash equivalents, and tangible assets, such as property. Aim to include at least two asset classes.
Diversify within asset classes
Let's say you purchase utility stocks. Mix it up by adding other industries, such as healthcare, energy, or technology. Again, if one industry loses value, other sectors can offset it. Aim for 25+ stocks or funds.
Go global
Including stocks from foreign companies can help safeguard against risks specific to a single region. For example, if the U.S. market is struggling, holding assets from other countries can balance your overall portfolio.
One of the kindest things you can do for yourself is to meet with a financial advisor who can help you create a portfolio that takes your goals and risk tolerance into account. Even if you're contributing to a 401(k) through work, allow a professional to look over the investment options you chose from your employer-provided investment menu. The fact that you're starting with $100,000 puts you in a good position. Now, it's just a matter of strategically adding to your wealth.
