Wanting a $1 million portfolio is an understandable goal, who doesn’t want to be a millionaire?
It’s completely possible to reach a large portfolio with regular investing and utilising the power of compound interest.
You’d run into a few problems if you just stuffed $1,000 a month under the mattress to reach $1 million. First, I’m not sure your mattress would be big enough to hide $1 million underneath it. The biggest problem is that just holding it as physical cash would take 1,000 months, or 83 years.
How to make $1 million quicker than 83 years
ASIC’s Moneysmart has a great compound interest calculator which lets you play around with difference scenarios.
Today’s interest rates have been pushed to record lows by the RBA, but it’s still possible to find savings accounts at subsidiaries of banks like Westpac Banking Corp (ASX: WBC) and National Australia Bank Ltd (ASX: NAB) which offer an interest rate of 2% or so.
If your $1,000 a month earns an interest rate of 2%, it would only take 50 years to reach $1 million. That’s 33 years quicker!
But I think shares could be the way to really get compound interest working for you. Australian shares have a long-term return average of 10% (excluding the bonus of franking credits).
So if you invest $1,000 a month and it continues to return 10% a year over the long-term then it would take less than 24 years. That’s 26 years quicker than bank interest and 59 years quicker than stuffing it under the mattress.
If you gave shares 50 years to compound it would reach a whopping $14 million.
Obviously the 10% average return is not guaranteed. It could be less, it might be more. Who knows what the Australian economy will do in the future?
Two of the best ways to access the average returns of the ASX are two exchange-traded funds (ETFs) called Vanguard Australian Share ETF (ASX: VAS) and BetaShares Australia 200 ETF (ASX: A200) which give exposure to the ASX 200 and ASX 300.
But there are overseas-focused diversified investments which have a record have delivering stronger returns than the ASX average like iShares S&P 500 ETF (ASX: IVV) and MFF Capital Investments Ltd (ASX: MFF).
There are individual shares that have created much stronger results like Altium Limited (ASX: ALU), a2 Milk Company Ltd (ASX: A2M) and Webjet Limited (ASX: WEB). But you’d have to identify some of the next winners before they become too large.
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Motley Fool contributor Tristan Harrison owns shares of Altium and Magellan Flagship Fund Ltd. The Motley Fool Australia owns shares of A2 Milk, Altium, and National Australia Bank Limited. The Motley Fool Australia has recommended Webjet Ltd. 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.