Making £1m in the stock market might seem like an unrealistic goal. But according to my calculations, you don’t have to win the lottery to reach this level of wealth.
Indeed, I calculate that just a few £100 a month will be enough to get you to this target, as long as you don’t try to be too smart and stick to a long-term savings plan.
Where to invest
One of the biggest mistakes most investors make is trying to chase returns. In reality, over the long term, the stock market has produced an average annualised return for investors of around 10%. By comparison, according to several studies, the average investor has achieved an actual performance of less than 5% per annum.
The reason why investor returns have been below average is because of investor overconfidence. A considerable number think they can do better than the market and try to trade accordingly. Unfortunately, the brutal reality is that this isn’t possible. According to research, you’re more likely to lose money than make anything by following an active trading strategy.
That’s why I believe the best way to make a million in the market is to use a low-cost tracker fund. This tracks the performance of an index, such as the FTSE 100 or FTSE 250, and adapts to changes in the market without you having to make any trades yourself. All you need to do is select which tracker you want to add to your portfolio and click ‘buy’.
A plan for saving
When you have decided which investment you want, the next stage is to work out how much you need to save to meet the £1m savings goal.
Two variables are required to calculate how much you need to save every month to reach that target. First, how long you have to save and secondly, the rate of return.
Over the past two decades, the FTSE 250 has produced an average annual return for investors of around 11%. Meanwhile, the FTSE 100 has produced an average annual return for investors in a region of 8% over the same time frame.
An investment in the FTSE 250 will get you to a million pounds faster, but there’ll be more bumps along the way. The index is made up of mid-cap stocks, which tend to grow more quickly but are more volatile investments. If you choose this index as your primary investment, I calculate just £250 a month will be enough to build a £1m savings pot over 35 years.
On the other hand, if you choose the FTSE 100, you will need to save around £450 a month for 35 years, assuming an average annual rate of return of 8%.
Two simple steps
Whichever route you choose, both of the examples above show just how easy it is to make £1m over the long-term if you have a fixed savings plan in place and use a hands-free index fund as your primary investment. So, if you want to make a million in the stock market, what are you waiting for?
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Rupert Hargreaves owns no share mentioned. 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 2019