The holy grail question of investing: Is it really possible to become a millionaire by investing in the stock market, and if so, under what circumstances?
While many people are attracted to the stock market by the potential for profits and return on capital with very little effort, it's never a sure thing. Many financial advisors, banks, and financial education providers, have an incentive to promote the idea that one can get rich by investing in the stock market. Their livelihood depends on attracting potential customers, and sometimes promotional materials can be misleading.
In addition to the well-intentioned professionals, there are also professional scammers, who promise impossible returns in a short amount of time only to run off with your money.
So, after taking all that into account, what chance is there of making a million on the equity markets? Today we take a look at how long it might take, and how much ready investing cash would be needed to reach that magic 7-figure number via the stock market.
First, we’ll focus on the total performance of the S&P 500, the leading U.S. large-cap index. Extensive research has shown that out-performing the S&P 500 over a long time period is very hard, and we’re interested in seeing whether any ‘Regular Joe’ can become a millionaire. We’ll reinvest all dividend payments in the market.
Second, we have to make certain assumptions on stock market returns based on past performance. As many disclaimers state, past performance is not indicative of future performance, but for our theoretical exercise, it’ll do.
Third, we’ll invest as part of our IRA, or in other words - we will not take taxes into account. We’ll also adjust the returns to inflation, to make sure we have a million dollars in purchasing power, and 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 even haven’t gotten to the math part yet.
How Fast Can Investments Grow?
Over the past 70 years, the S&P 500’s compound annual growth rate (CAGR) is 7.56%, after adjusting for inflation and reinvesting dividends. Essentially, this means that over the past 70 years you could replace all the bubbles, crashes and inflation in a steady 7.56% growth a year, and get to the exact point we are at today.
Based on this rate, we can now calculate how fast someone can get to a million dollars based on three variables: the initial amount invested, an additional annual investment, and the years the money would take to compound.
Let’s start with an easy example. With only an initial investment of $1,000 and a CAGR of 7.56%, it would take you 95 years to cross the $1 million threshold. With only $1,000, you can create a millionaire 5 generations from now. That’s nice, but not exactly what we're after. With an initial investment of $10,000, it would take you 64 years to reach $1 million. Again, not great.
How Much To Invest?
The question then becomes, how big of an initial investment do you have to make to become a millionaire in more reasonable timeframes, say - 10, 20, 30, and 40 years.
To become a millionaire within 10 years, you’d need to invest a hefty $485,000. You’ll 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.
Now, let’s evaluate a far more common scenario, of a smaller initial investment with annual additions. Again, let’s start on the low end of the spectrum.
If you can make an initial investment of $1,000 and invest another $1,000 yearly ($83 a month), it’ll take you 58 years to amass a million dollars. Not great, but a lot better than the 95 years we previously needed. Similarly, with an initial investment of $10,000 and a yearly addition of $3,000 ($250 a month), it’ll take you 41 years to get to a million dollars.
For those of us with no initial investment but more money to spare on a monthly basis, you can become a millionaire by investing $1000 every month for 27 years. Over those 27 years, you’d have invested $324,000 and earned $726,000 from the stock market. Add an initial investment of $100,000, and you can shave 7 years off and become a millionaire in 20 years.
Lastly, if you have $100,000 and $25,000 to invest every year, you’ll get to a million dollar in exactly 15 years.
All The Options
Here’s a summary table with the many options we’ve covered:
Becoming a millionaire by investing in the stock market is possible, but it’ll take time. There are no shortcuts to wealth, and it must be accumulated and compounded over time. Unsurprisingly - the more money you have, the faster you’ll get to the coveted threshold.
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