I get it. A million dollars. The dream. To make money out of nothing is what every investor dreams of – and to be a stock market millionaire… well just writing that phrase gave this writer goosebumps.
But the reality is that making this kind of return (9,990% to be exact) is going to take a lot of time, unless you’re extraordinarily lucky or extraordinarily talented (most likely both).
But it is possible, so let’s do some maths.
What is the rule of 72?
The rule of 72 lets you calculate how long it will take for an investment to double. All you do is divide the number 72 by your expected rate of return. So if your portfolio returns an average of 10% each year, it will take you 7.2 years for your principle to double.
Using this rule and ASIC’s helpful compound interest calculator, we can work out how long it will take to get to the mil’ mark with $10,000 and nothing else. Well, you would need approximately 6 doubles and at 10%, it will unfortunately take roughly 60 years. But if you bump that 10% return up to 12% – we’re down to 36 years. At 15% we’re at 29 years and at 20%, only 22 short years before you’re a millionaire.
This may not be too comforting for all of you aspiring Richie Richs out there – 20% returns for 22 years is a big ask. So consider this instead. If you earn a 12% return, but also contribute an extra $100 per week to your initial $10,000, it will only take 26 years instead. If you can stretch that $100 to $150, you’d be looking at 23 years and if you could double it to $200 a week, 21 years is starting to sound ok to me.
But a 12% return is still an above market return, so you’ll have to make sure you’re also investing in high quality companies that can outperform the index over time. Names like Macquarie Group Ltd (ASX: MQG), Xero Ltd (ASX: XRO) and Ramsay Health Care Ltd (ASX: RHC) come to mind.
And if you’re more of a passive investor and want to stick with index funds like the iShares Core S&P/ASX 200 ETF (ASX: IOZ) with an average rate of return around 10%, it will take approximately 26 years to hit that million with $200 a week on top of your 10 grand.
So keep this in mind – it’s very hard to get rich quickly on the stock market – but not so hard to get rich slowly. You just have to be consistent in your contributions, and very, very patient.
Where to invest $1,000 right now
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Sebastian Bowen has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of Xero. The Motley Fool Australia owns shares of and has recommended Macquarie Group Limited. The Motley Fool Australia has recommended Ramsay Health Care Limited. 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 Scott Phillips.