How to turn $20,000 into a $1 million share portfolio

Credit: Pictures of Money

Why is it that some people get rich but others don’t? In reality there are a multitude of reasons but for investors in the share market the reasons can be more narrowly defined.

While it would certainly be naive to suggest that getting rich is easy, by utilising the following steps it certainly can be achievable.

To begin with, investors need to acknowledge that the “secret” to growing your wealth is to compound your earnings.

Working through a practical example can highlight this point…

Imagine you can save $20,000 by the time you turn 30. While that is definitely a hefty sum, it’s arguably not impossible for someone who diligently puts aside some of their salary from the time they enter the workforce.

Perhaps you pick the stocks yourself, or alternatively perhaps you outsource to a high quality listed investment company (LIC) such as Argo Investments Limited (ASX: ARG) or utilise the services of a market-beating fund managed by the likes of Platinum Asset Management Limited (ASX: PTM) or Magellan Financial Group Ltd (ASX: MFG).

Next, let’s assume your portfolio of shares (which has a starting value of $20,000) can achieve a 14% return per annum (pa) for a period of 30 years. That’s certainly a very good return, but it’s also certainly not impossible.

The maths is quite straight forward. A $20,000 investment at a rate of return of 14% pa will grow thanks to the beauty of compounding into $1,019,003 in 30 years. So from a relatively meagre beginning of $20,000 at the age of 30, aided by a solid investment return of 14% compounded annually for 30 years, by the age of 60 you’re a millionaire!

There are a few key takeaways from this example worth noting:

Firstly, it takes time to build wealth. The earlier you start and the longer you allow your investments to compound for the wealthier you will become.

Secondly, spending less than you earn is necessary so that you can save for your initial investment.

Thirdly, compounding is a must. That means not taking any of your money out and reinvesting all your profits too.

Fourthly, the average annual return achieved matters and makes a big difference. While 14% was used in this example, should your portfolio achieve a return just 1% lower at 13% pa then your portfolio’s value at age 60 drops to $782,318 – that’s a big reminder of why clever stock picking matters!

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Motley Fool contributor Tim McArthur has no position in any stocks mentioned. Unless otherwise noted, the author does not have a position in any stocks mentioned by the author in the comments below. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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