The people who wind up with million-dollar investment portfolios aren't always wealthy from the start. In fact, a lot of ordinary people manage to invest their money in a way that eventually makes them millionaires. If that's a goal of yours, here are three easy steps to make it happen.
1. Invest from a young age
When it comes to growing wealth as an investor, time is perhaps your greatest asset. That's why it's so important to start investing from a young age. And it also means that it's a good idea to start investing even if you only have a few hundred dollars to work with.
In fact, imagine you put $250 a month into a brokerage account or retirement plan over a 45-year period. If you manage to generate an average annual 8% return during that time, you'll end up with over $1.1 million.
2. Get aggressive
The 8% return we just used in our example? It's a reasonable one to work with for a stock-heavy portfolio, since it's a few percentage points below the stock market's average. But if you play it safe and stick to more conservative investments, like bonds, your returns might come in much lower.
If you're in your 20s, 30s, or 40s, and your goal is to leave your investment portfolio untapped until you reach retirement age, then you should really have the bulk of your assets in stocks. If you split your assets evenly between stocks and bonds, your portfolio might generate more like a 5% average annual return. In our example, that would leave you with around $479,000 -- still a lot of money, but clearly nowhere close to the $1 million you might be aiming for.
The 8% return we relied on earlier is by no means guaranteed. But if you want to increase your chances of snagging solid returns in your portfolio, you'll need to diversify.
If you load up on stocks from a single market segment, you'll risk taking major losses if that specific segment tanks. Instead, spread your money around. Buy some tech stocks, but also, some healthcare stocks, energy stocks, bank stocks, and auto stocks.
If the idea of choosing different stocks is overwhelming to you, there's another option you can look at -- broad market ETFs. ETFs allow you to own a whole bunch of stocks with a single investment. And if you go heavy on S&P 500 ETFs in particular, you'll effectively be owning 500 different companies -- without having to go out and acquire them individually.
A $1 million portfolio could be yours
You might think it takes a combination of high earnings and luck to be successful as an investor. In reality, it takes the right strategy. If you make a point to start investing early in life and do so consistently, there's a good chance you'll end up with a portfolio balance you're more than happy with -- especially if you maintain a diverse mix of quality stocks or ETFs that lends to steady growth over time.
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