I believe that reaching a $1 million share portfolio is one of those things that a lot of people should aspire to do over their lives. Being a millionaire should mean financial independence in most places in the world, giving you more freedom in life and allowing you to be more generous and philanthropic with your money.
So how are you supposed to get there?
I believe there are two main ways to reach a $1 million share portfolio:
Utilise long-term compound interest with diversified portfolios
Albert Einstein supposedly said that compound interest is the eighth wonder of the world. I think it’s the strongest financial force there is, both for building wealth and destroying wealth.
Shares have been performing for many decades. When you look at the long-term data you’ll see that shares return an average of 10% per annum when you re-invest the dividends.
There are exchange-traded funds (ETFs) portfolio-based investments that you can invest in to achieve the average share market return for very low management costs like BetaShares Australia 200 ETF (ASX: A200), Vanguard MSCI Index International Shares ETF (ASX: VGS) and iShares S&P 500 ETF (ASX: IVV).
If your share portfolio achieves 10% a year return then your money doubles in less than eight years. That’s great and would really help achieve a $1 million share portfolio.
There are some listed investment businesses that try (and do) outperform their index benchmark over time with their own hand-picked share portfolios. Two of my favourites are Magellan High Conviction Trust (ASX: MHH) and Washington H. Soul Pattinson and Co. Ltd (ASX: SOL).
If the investments you choose manage to return 10% a year after fees over the long-term then your wealth will grow very nicely.
To get a $1 million share portfolio with shares returning 10% a year, you would only need to invest $1,000 a month and in less than 24 years you’ll get there according to Moneysmart’s calculator. If you invest more than $1,000 a month you’ll get there even quicker.
Find the best performing shares
The average share market return has been 10% a year. But that includes the poor shares as well. Imagine if you were able to just invest in the great ASX shares – the ones that produce the great returns that have growing profit margins, great management and are (probably) expanding overseas.
For example, over the past five years the share price of Altium Limited (ASX: ALU) is up 574%, the share price of Pro Medicus Limited (ASX: PME) is up 1,295% and the A2 Milk Company Ltd (ASX: A2M) share price is up 3,714%.
Of course, it’s impossible to pick every single winner. But imagine if you could find enough winners to help boost your portfolio returns to an average of 12% a year or even 15% a year.
Average returns of 12% per annum would turn investing $1,000 a month into a $1 million share portfolio in less than 22 years, shaving off about two years. Average returns of 15% per annum would turn investing $1,000 a month into $1 million in less than 19 years, saving another three years.
It might be very tricky to achieve 15% returns a year from here, but 12% returns are certainly possible.
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Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. recommends Pro Medicus Ltd. The Motley Fool Australia owns shares of and has recommended Pro Medicus Ltd. and Washington H. Soul Pattinson and Company Limited. The Motley Fool Australia owns shares of A2 Milk and Altium. The Motley Fool Australia has recommended Vanguard MSCI Index International Shares ETF. 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.