Who wants to be a millionaire? I do! And as National Lottery sales attest, so do many millions of others. I used to think the only way for ordinary people to become millionaires was through luck, through building highly successful businesses or inheritance. Now though, I’m delighted to discover that the stock market holds the key to ordinary citizens making a million pounds. I don’t even need thousands of pounds to get started. I just need to be prepared to wait, invest regularly and earn a decent return on my investments.
Here’s how to make a million pounds
As an example, if I commit to investing £250 a month for the next 40 years, I’d need an effective annual interest rate of 8.8% to make a million. That’s not impossible. Many index funds have brought their shareholders returns of between 10% and 30% in the past five years. However, returns can be inconsistent, depending on economic circumstances. To consistently achieve a return of 8.8% per year for 40 years will be harder. It’s a lengthy time horizon and anything can happen. Also, risk correlates with reward, so the riskier the investment, the higher the potential returns (or losses).
The coronavirus pandemic, for example, has brought sensational returns to some investors and obliterated others completely. Nevertheless, this is just a passing phase and economic boom times will undoubtedly return once more. That’s why I like the idea of long-term investing because it smooths over the bumps in the road, combining the highs and lows to gradually build a nice nest egg.
Building exponential wealth
However, the real power lies in compounding. Compound interest is the result of interest being paid on interest. So, if I receive a 5% dividend on my BP shares, then the following year I receive another 5%. This second time, it’s on the capital I’ve invested, as well as the dividends already received. Over time, compound interest is a very powerful tool to exponentially growing wealth and it can help me make a million pounds.
Increasing the monthly contributions or the interest rate earned can help compounding work its magic. Here’s an example.
No. of years
Effective annual interest rate
By increasing both the monthly contributions and achieving high interest returns, I can make a million pounds within a shorter time frame.
Make a million by following Warren Buffett
Billionaire investor Warren Buffett is a big fan of buy-and-hold investing, and the table above illustrates why. As he carefully researches businesses before buying shares in them, he can rest assured he’s confident in his purchase. That is, he’s expecting the company to thrive in the years ahead and make him a lot of money. This method of investing has consistently worked for Buffett throughout his eight decades of investing in stocks. But it’s a method I think can work for any of us who put in the effort to research stocks and choose carefully rather than impulsively.
The stock market is easily accessible to any of us and whether buying funds, trusts or individual stocks, I think everyone should try out investing for themselves. Many of the products we take for granted are created by successful businesses of which we can own a piece and share their journey of success.
The post How to make a million pounds! Investing in the stock market makes it possible appeared first on The Motley Fool UK.
Kirsteen owns shares of BP. The Motley Fool UK has no position in any of the shares mentioned. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2021