If we disregard accidental events, such as winning a lottery or inheritance from your aunt living in the USA, you can become a millionaire, for example, by regular, long-term investing of, say, €100 every month. You only need two things for this – enough time and the correct investment strategy.
Let’s begin with the correct investment strategy. The basic investment decision you need to make is to select the right proportion of bonds and stocks. If we follow the long-term statistics from the US market (1926 – 2016), the average historical earnings of a 100-percent bond-based portfolio reached 5.4%, while a portfolio containing only stocks (100-percent share-based portfolio) acquired as much as 10.2% (Source: Vanguard).
With a regular monthly investment of €100 put into a 100-percent bond portfolio, you would become a millionaire after 71 years. Investment into the 100-percent stock portfolio would cut down the waiting time to a seven-digit figure on your account to ‘only’ 44 years. As we can see from comparing both figures – with long-term regular investment, every single percentage point truly matters. This is why it’s convenient to focus your investment strategy exclusively on stock-based investments. This is also the main reason why Across Investičné Sporenie+ comprises solely stock-index funds. Moreover, the earnings are – after one year from the purchase – exempt from income tax of natural persons.
How to cut down the waiting time for the first million?
Essentially, there are two options. The first is to increase the regular monthly invested amount. In this case, the maths is simple: A two-hundred-euro monthly investment reduces the waiting time for the first million by 7 years (that is, to 37 years), 500 euro per month to less than 29 years. If you invested a full thousand euro every month, you can join the millionaires’ club after 22 years. Obviously, all of the above is provided that your stock-based portfolio would be growing by 10.2% per year on average.
The second option for joining the club of people with seven digits in their investment account is a one-off additional investment to your regular monthly sum. If, for example, you added to your 500-euro monthly investment a one-time amount of a hundred thousand euro, the above-mentioned 29 years would be cut down to 19. And that no longer sounds like Waiting for Godot.
The snowball effect
Becoming a millionaire doesn’t have to be as complicated as it may initially seem. Albert Einstein himself labelled the effect of interest on interest (compound interest) as the eighth wonder of the world, and Warren Buffett himself acknowledged that the source of his wealth to a great degree is exactly the interest on interest while comparing the effect to a snowball. If you want to get to your million using a passive method, say, by regular investment of smaller amounts, you should bear in mind the following principles:
- Set a realistic plan – what amount would you like to acquire and in what time (see the so-called Magic Table),
- Invest only in stock index funds (attractive earnings, low fees, no taxes) – every percentage point of the earnings matters,
- Invest regularly (set a standing order on your account) and in the long-term (in years),
- One-time investments should be applied mainly during a temporary decline of the stock market.