I think that almost anyone can build a $1 million portfolio by investing just $1,000 a month.
This isn’t a get-rick-quick idea. I’m not suggesting you’ll get a $1 million portfolio in two years by investing $500,000 a year. Time and compound interest are the main tools to make it happen.
With no compound interest it would take 20 years of saving $50,000 a year. That’s too much!
One of the quotes that sums up compound interest nicely is the one attributed to Albert Einstein: “Compound interest is the eighth wonder of the world. He who understands it, earns it… he who doesn’t… pays it.”
Are bank accounts the best way to benefit from compound interest?
There are many different ways to generate interest from your money. You can earn interest from bonds, term deposits and savings accounts. Those are safe options, but when you factor in inflation they can be detrimental to growing your wealth. The official RBA interest rate is now just 0.25%, which won’t grow your wealth much at all.
You’re not going to get to $1 million unless you’re saving tons of cash.
I believe the best two types of assets for growing long-term wealth is property and businesses. If you buy the right property at the right time then it can produce big returns when using leverage – just look at the last decade. However, I don’t think taking on a large amount of debt makes sense in this environment.
Plus, when you think about headline property return figures, it doesn’t include the cost of renovations, the running costs or other factors like an empty property, non-paying tenants or damage.
I think that the share market is a great way to build wealth. Long-term returns tell us that the Australian and US share market have returned around 10% per annum over the decades. You can access broad markets with picks like Vanguard Australian Shares Index ETF (ASX: VAS), iShares S&P 500 ETF (ASX: IVV) or Vanguard MSCI Index International Shares ETF (ASX: VGS).
Don’t forget that Australians benefit from the Australian taxation system with franking credits to ensure that Aussies aren’t taxed twice on business profits paid out as a dividend. Franking credits usually aren’t included in Australian share market returns.
Share returns for a $1 million portfolio
Let’s get back to the $1 million target. If your portfolio compounds at 10% a year and you invest $1,000 a month then it would take less than 24 years to get to $1 million. If you’re 25 you could become a millionaire before the age of 50. That sounds good to me.
The scenario I outlined above assumes you stick to investing $1,000 a month for the whole duration. Imagine if you started investing more when you turn 30 or 35. Perhaps you could start by investing $1,500 or $2,000 a month instead of $1,000. What if your portfolio could return 12% a year? In that case it would only take about 22 years.
What can you do to increase your returns from 10% a year to 12% a year? Well if you have a time machine handy you could go back and invest in shares like REA Group Limited (ASX: ALU), Pro Medicus Limited (ASX: PME) and CSL Limited (ASX: CSL).
What are some names for the future? I currently like growth names like Citadel Group Ltd (ASX: CGL), Pushpay Holdings Ltd (ASX: PPH) and Bubs Australia Ltd (ASX: BUB). Dividend picks with a decent yield I like are Washington H. Soul Pattinson and Co. Ltd (ASX: SOL), MFF Capital Investments Ltd (ASX: MFF), and WAM Microcap Limited (ASX: WMI).