The idea of building a $1 million portfolio might sound more daunting than climbing Mt. Everest. In reality, it's more achievable than you probably think. With enough time, discipline, and the right mix of investments, the long-term power of compounding can get you to the $1 million mark and beyond!
Just take a look at history. If you invested $10,000 in the S&P 500 (^GSPC +0.17%) at the beginning of 1996, it would have grown to roughly $214,000 with dividends reinvested. Now, that's clearly not $1 million, but that's how large it grew with a one-time investment. Imagine how big it could get if you added a modest monthly investment to it over all those years.
This is why the idea of regular, consistent investing over time is one of the best pathways to millionaire status.
Over the past century, the S&P 500 has returned around 10% annually. The index has performed much better than that over the past decade, but the next decade could very well be much worse. When projecting long-term returns, it's better to be a little more conservative.
Let's assume that an investor earns an 8% average annual return and chooses to make regular monthly investments via a 401(k) or another systematic investing plan. Assuming they're starting from zero, here's approximately how much it would take over time to accumulate $1 million.
Data source: Investor.gov. Note: Compounding is on a monthly basis.
This table should illustrate two things:
Starting early has a huge advantage in how much you have to invest every month to reach the end goal.
It doesn't take thousands of dollars up front to create $1 million in wealth.
It won't happen quickly, though. If you're starting from the ground floor, 20 years is probably the minimum time needed to reach seven figures. Any faster than that and you're probably looking at a monthly investment of at least $2,000. Most people probably don't have that.
But it could take considerably less than that if you start early enough. Even a few hundred dollars a month could do it in some circumstances.
There's no question that the biggest factor in reaching $1 million is consistency.
Over the course of decades, you'll probably experience multiple recessions and bear markets. The key to success is maintaining a long-term view throughout those periods. That means no emotional selling decisions and continuing to make monthly investments even though stock prices fall.
If you can do that and invest in the broad U.S. stock market via something like the Vanguard S&P 500 ETF (VOO +0.11%) or the Vanguard Total Stock Market ETF (VTI +0.02%), the title of "millionaire" is definitely within reach.
David Dierking has positions in Vanguard Morningstar Total Stock Market ETF. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.
