The holy grail issue of investing: Is it really possible to become a millionaire by investing in the stock market, and if so, under what circumstances?
Although many people are attracted to the stock market with little effort by the potential for profit and return on capital, that is never a thing. Many financial advisers, banks and financial education providers have an incentive to promote the idea that one can become rich by investing in the stock market. Their livelihood depends on attracting potential customers and sometimes promotional material can be misleading
In addition to the well-meaning professionals, there are also professional scammers, who promise that they will be impossible to return in a short time and then go away with your money.
So after taking all of the above into account, what chance is there of earning a million on the stock markets? Today we look at how long it could take and how much cash investing it would take to reach that magical 7-digit number through the stock market.
Can A & # 39; Regular Joe & # 39; become a millionaire?
First, we will focus on the overall performance of the leading US large cap index. Extensive research has shown that it is much more difficult to surpass the S&P 500 over a long period, and we are curious if a & # 39; Regular Joe & # 39; can become a millionaire. We will reinvest all dividend payments in the market.
Second, we must make certain assumptions about the return on the stock market based on past performance. As many disclaimers claim, past performance is not indicative of future performance, but that is enough for our theoretical exercise.
Third, we will invest as part of our IRA, or in other words – we do not take taxes into account. We will also adjust the return on inflation to ensure that we have a million dollars in purchasing power, not just a nominal million.
As you can see, this seemingly simple yes or no question requires quite a bit of mental gymnastics, and we have not even come to the maths section yet.
How fast can investments grow?
Over the past 70 years, the compound annual growth rate of the S & P 500 (CAGR) is 7.56%, after correction for inflation and reinvestment of dividends. In essence, this means that in the last 70 years you have been able to replace all bubbles, crashes and inflation with a constant growth of 7.56% per year, reaching the exact point where we are today.
Based on this percentage, we can now calculate how quickly someone can make a million dollars based on three variables: the initial amount invested, an additional annual investment, and the years that the money should be collected.
Let's start with a simple example. With only an initial investment of $ 1,000 and a CAGR of 7.56%, it would take 95 years to exceed the $ 1 million threshold. With just $ 1,000 you can now make 5 generations into a millionaire. That is nice, but not exactly what we are looking for. With an initial investment of $ 10,000, it would take 64 years to reach $ 1 million. Again, not great.
How much to invest?
The question then becomes how large the initial investment you have to make to become a millionaire in more reasonable periods of time, say – 10, 20, 30 and 40 years.
To become a millionaire within 10 years, you would have to invest a hefty $ 485,000. You need about $ 235,000 to make it in 20 years, $ 115,000 to make it in 30 years, and $ 55,000 to make it in 40 years.
Let us now evaluate a much more common scenario of a smaller initial investment with annual additions. Again, let's start at the bottom of the spectrum.
If you can make an initial investment of $ 1,000 and invest another $ 1,000 per year ($ 83 per month), it will take you 58 years to earn a million dollars. Not great, but much better than the 95 years we needed before. Similarly, with an initial investment of $ 10,000 and an annual addition of $ 3,000 ($ 250 per month), it takes 41 years to get a million dollars.
For those of us who have no initial investment but more money on a monthly basis, you can become a millionaire by investing $ 1000 every month for 27 years. In those 27 years you had invested $ 324,000 and earned $ 726,000 from the stock market. Add an initial investment of $ 100,000 and you can shave for 7 years and become a millionaire within 20 years.
Finally, if you have $ 100,000 and $ 25,000 each year to invest, you will reach a million dollars in exactly 15 years.
All options
Here is a summary table with the many options that we have discussed:
Monster
Becoming a millionaire by investing in the stock market is possible, but it will take time. There is no shortcut to wealth, and it must be collected and made worse over time. Not surprising – the more money you have, the faster you reach the coveted threshold.
