3 Simple Tricks to Building a Million-Dollar Investment Portfolio
Whether you're saving for retirement or simply want to increase your net worth, investing in the stock market is a fantastic way to generate long-term wealth.
If you're new to the stock market, though, it can be intimidating to get started. There are seemingly unlimited stocks to choose from, and the wrong strategy could result in losing more than you gain.
The good news is that it's simpler than you might think to make money in the stock market, and it's even possible to build a portfolio worth $1 million or more. Here's exactly how to get there.
1. Get started investing now
Time is your most valuable asset when investing in the stock market. Thanks to compound growth, your money will grow faster the longer it has to accumulate. The sooner you get started, then, the less you'll need to invest each month to see substantial earnings.
Say, for example, you start investing $350 per month right now and can continue investing consistently for 35 years. In another scenario, say you wait 10 years to get started, but at that point, you can invest $700 per month. If you're earning a 10% average annual return on your investments in both scenarios, here's approximately how your savings would add up over time:
Number of Years | Total Portfolio Value: Investing $350 per Month Now | Total Portfolio Value: Investing $700 per Month Starting in 10 Years |
|---|---|---|
10 | $67,000 | $0 |
15 | $133,000 | $51,000 |
20 | $241,000 | $134,000 |
25 | $413,000 | $267,000 |
30 | $691,000 | $481,000 |
35 | $1,138,000 | $826,000 |
Data source: author's calculations via investor.gov.
Even if you double your monthly contributions, you'd still end up with around $312,000 less over decades if you wait 10 years to begin investing.
If you don't have hundreds of dollars per month to invest or several decades to let your money grow, that's OK. It's still beneficial to get started now. You can always increase your contributions later, but you can't get this time back.
2. Forget about timing the market
The market has experienced stomach-churning volatility over the past few years, and it's tempting to try to wait until the perfect moment to invest. But timing the market accurately is next to impossible, and if your timing is off, you could put your investments at risk.
For example, maybe you predict that stock prices are going to fall soon, so you sell all your stocks right now in preparation for a downturn. But if that doesn't happen and the market continues surging, you'll have missed out on those gains. Then if you choose to invest again later, you'll end up rebuying the same stocks at much higher prices.
Rather than timing the market, a safer alternative is called dollar-cost averaging. With this strategy, you're investing a set amount of money at regular intervals throughout the year -- no matter what the market is doing.
Sometimes, you'll end up investing when stock prices are at their highest. While that isn't ideal, you'll also invest when prices are at rock bottom. Over time, those highs and lows should average out. This approach can take the guesswork out of when to invest, helping avoid the costly mistake of mistiming the market.
3. Invest in the right places
The investments you choose will make or break your portfolio. While there isn't a single correct way to invest, a long-term strategy is key to maximizing your earnings while minimizing risk.
The strongest stocks are the ones with solid underlying business fundamentals, such as a competitive advantage, strong financials, and a competent leadership team to guide the company through both good and bad economic times. These stocks will still experience short-term volatility, but they're far more likely to recover from downturns and see long-term growth.
If you'd prefer a more low-maintenance approach, investing in an index fund -- such as an S&P 500 index fund -- could be a smart move. Each index fund contains dozens or hundreds of stocks bundled together into a single investment, so you won't need to spend as much time researching.
The right strategy for you will depend largely on your risk tolerance, goals, and how much effort you're willing to put in. Individual stocks require more research and can sometimes carry more risk, but there's also a better chance you'll earn above-average returns. If you're comfortable with potentially lower returns in exchange for an investment that requires less effort, an index fund may be a better fit.
Building wealth in the stock market isn't necessarily easy, but it's simpler than it might seem. With the right strategy, you can set yourself up for potentially significant long-term returns while keeping your money safer at the same time.
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3 Simple Tricks to Building a Million-Dollar Investment Portfolio was originally published by The Motley Fool
