By Clement Thibault | investing.com
The million dollar investment question: is it really possible to become a millionaire by investing in the stock market? And if so, under what circumstances?
While many people are drawn to the stock market for the potential for profits and a return on capital with very little effort, it is never a sure thing. Many financial advisers, banks, and financial education providers are encouraged to promote the idea that one can get rich by investing in the stock market. Your livelihood depends on capturing potential customers, and sometimes promotional materials can be misleading.
In addition to well-intentioned professionals, there are professional scammers, who promise impossible profits in a short period of time just to get our money.
So, after taking all of that into account, what chance is there of making a million dollars in the stock markets? We take a look at how long it would take and how much investment cash you would need to reach that magic seven-figure number through the stock market.
Can anyone become a millionaire?
First, we'll focus on the general performance of the S&P 500, the leading large-cap index in the United States. Extensive research has shown that outperforming the S&P 500 over a long period of time is very difficult, and we are interested in seeing if anyone can become a millionaire. We will reinvest all dividends in the market.
Second, we have to make certain assumptions about stock market returns based on past performance. As many legal notices establish, past profitability is not indicative of future results, but for our theoretical exercise, it is worth it.
Third, we will invest as part of our individual retirement account (IRA) or, in other words, we will not take taxes into account. We will also adjust the benefits for inflation, to make sure that we have a million dollars in purchasing power and not just a nominal million.
As we can see, this seemingly simple yes/no question requires a bit of mental gymnastics, and we haven't gotten to the math part yet.
How fast can investments grow?
Over the past 70 years, the S&P 500's compound growth rate (CAGR) is 7.56%, after adjusting for inflation and reinvesting dividends. Basically, this means that in the last 70 years you could substitute all the bubbles, crashes and movements in inflation for a constant growth of 7.56% per year and get to the exact point where we are today.
Based on this rate, we can now calculate how quickly a person can make a million dollars based on three variables: the initial amount invested, an additional annual investment, and the years it would take for the money to grow.
Let's start with an easy example. With just an initial investment of $1,000 and a CAGR of 7.56%, it would take 95 years to cross the $1 million threshold. With just $1,000, you can become a millionaire five generations from now. That's fine, but it's not exactly what we're looking for. With an initial investment of $10,000, it would take him 64 years to reach a million. Again, not very good.
How much to invest?
The question then is, how big does an initial investment have to be to become a millionaire in more reasonable terms of 10, 20, 30 or 40 years?
To become a millionaire in 10 years, you would have to invest no less than $485,000. You'll need about $235,000 to do it in 20 years, $115,000 to do it in 30 years, and $55,000 to do it in 40 years.
Now, we are going to evaluate a much more common situation, of a smaller initial investment with annual additions. Once again, we are going to start at the lower end of the spectrum.
If you make an initial investment of $1,000 and invest another $1,000 a year ($83 a month), it will take 58 years to accumulate $1 million. Not amazing, but much better than the 95 years we previously needed. Similarly, with an initial investment of $10,000 and an annual sum of $3,000 ($250 per month), it will take 41 years to reach $1 million.
For those of us with no initial investment but more money available on a monthly basis, we can become millionaires by investing $1,000 a month for 27 years. In these 27 years, he would have invested $324,000 and earned $726,000 in the stock market. Add an initial investment of $100,000, and you can subtract seven years from that and be a millionaire in 20 years.
Ultimately, if you have $100,000 and $25,000 a year to invest, you'll make $1 million in exactly 15 years.
Here is a summary table with the many options we have covered:
Becoming a millionaire by investing in the stock market is possible, but it will take time. There are no shortcuts to wealth, and it must be accumulated and increased over time. As expected, the more money you have, the faster you will reach the coveted threshold.