Building a $1 million portfolio doesn’t require betting on speculative, long-term growth stocks.
Consistency and sticking to a simple plan have proven to be more valuable.
With enough time and dedication, almost anyone can build a $1 million portfolio.
These 10 stocks could create the next wave of millionaires ›
Many investors dream of building a $1 million investment portfolio. Often, they think all they need is a great stock pick and are looking for diamonds in the rough and undervalued opportunities every month.
Indeed, many millionaires have been made from small investments of four or five figures in companies before their stock prices soared. For example, invest $5,000 NVIDIA Works from a decade ago are now worth well over $1 million.
But you don’t have to find the next Nvidia to become a millionaire. There’s an easier way to achieve this goal – invest in an exchange-traded fund (ETF) each month instead of looking for a moonshot. Here’s how this simple strategy can turn your monthly investment into $1 million.
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The simplest, most effective strategy for building a $1 million portfolio is not to try to find the next great growth stock. While you may hear stories from friends or in-laws about how they made their fortune investing in Nvidia, Teslaor Palantir Technologyyou won’t hear stories about how they lost tons of cash by investing in stocks that no one had ever heard of. While one big winner can outweigh many losers, a more consistent path to $1 million is preferable.
Here’s Why You Should Consider Buying Vanguard S&P 500 ETF(NYSE: VOO). It won’t give you any great stories to tell at parties, but it will give you the rewards of closely tracking a benchmark index used by stock market professionals and party guests.
That’s fine.
In fact, over the long term, if you take into account most professional money managers’ fees, they would struggle to match the S&P 500. Based on data from the past five years, approximately 86% of businesses failed to meet the benchmark S&P Globaland if you look at after-tax and risk-adjusted returns, the numbers get even worse. The numbers are also worse for growth investors and their relative benchmarks of large-cap, mid-cap and small-cap stocks.
While individual investors have some unique advantages over professional fund managers, they also have some serious disadvantages. They lack researchers to provide them with data and analysis to guide their decisions. They also may not have the extra 60 hours per week dedicated to managing a portfolio. In other words, beating the market is possible, but really hard.
But if your goal is to create a $1 million portfolio, you don’t need to beat the market. You just need to keep investing month after month. In fact, if you hadn’t purchased $5,000 worth of Nvidia stock in January 2016, and instead purchased the Vanguard S&P 500 ETF, you would have had $21,000 in your portfolio. But if you continued adding $5,000 to the ETF each month, you would have over $1.3 million in your portfolio today. Granted, not everyone has $5,000 a month to invest in the stock market, but you can still become a millionaire with a smaller investment and enough time.
Unless you have a time machine, no one can tell you exactly how long it will take to reach millionaire status. But we can use historical data to get a rough estimate of how long it will take based on how much you can invest each month.
Over the last century, the S&P 500’s historical average annualized total return has been approximately 10.5%. This is probably our best guess at how much the index will grow over the next century. Importantly, the longer your time horizon, the more likely it is that the index will match expected returns. The stock market is significantly more volatile than many other financial markets, which means short-term returns can differ significantly from average.
The table below provides an estimate of the time it would take to build a $1 million portfolio from scratch by investing only in the Vanguard S&P 500 ETF each month.
monthly investment
Estimated time to reach $1 million
$500
29 years and 9 months
$1,000
22 years and 4 months
$2,000
16 years and 5 months
$3,000
13 years and 4 months
$4,000
11 years and 3 months
$5,000
9 years and 10 months
Author’s calculations.
There are a few points worth noting about the table above.
First of all, you’ll notice that doubling your investment every month doesn’t cut in half the time it takes to become a millionaire. That’s because a big part of building a million-dollar portfolio involves compounding your investments over time. The amount you contribute has less of an impact than the amount of time you contribute on an ongoing basis. This is especially true for smaller monthly investment amounts and longer investment horizons.
Second, as mentioned above, volatility can have a significant impact on your actual results. Continuously investing in an ETF will smooth out the results whether the market pushes its price higher or lower each month. However, poor return sequencing can significantly extend the estimated time. The shorter your projected time frame, the more likely you are to adjust to market fluctuations.
Finally, the 10.5% annualized return does not take inflation into account. A $1 million investment won’t have the same purchasing power in the future as it does now. You can adjust this by increasing your monthly investment each month, or simply lower your return expectations and invest for a longer period of time.
But if you want an easy way to build a million-dollar portfolio, you don’t need to buy the latest “can’t-miss” growth stocks. Just keep investing in boring ETFs.
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Adam Levy has no position in any of the stocks mentioned. The Motley Fool holds and recommends Nvidia, Palantir Technologies, S&P Global, Tesla and the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
This ETF Is the Easiest Way to $1M by 2026 Originally published by The Motley Fool
