Do you want to know how to become a stock market millionaire? It’s much easier than you think. Let me rephrase that, it takes a lot less work to become a stock market millionaire than you think. In fact, the most work you do is at the beginning of the process. Once you have your foundation laid, you can pretty much put things on auto-pilot.
How great is that? If you take about an hour or two of your time now to lay the groundwork, you are 95% of the way to becoming a stock market millionaire. What do I mean when I say laying your foundation? I am talking about creating your investing strategy. You can’t be jumping in and out of the market, chasing returns and trying to pick the best time to buy or sell. You have to have a strategy and stick to it, in both good times and bad times.
So what exactly do you need to know to become a stock market millionaire? I’ve outlined all the steps below to help you build your wealth in the stock market.
If you don’t have a plan, how do you know where you are going? Better yet, how do you know you even succeeded? You don’t. When it comes to investing, having a plan is crucial. Most investors jump around from investment to investment. They never see any real increase in their portfolio values so they give up investing. They think the stock market is rigged against them.
What most of these investors fail to have is a plan. If they had a plan to follow and they followed it, they would be successful. By having a plan, you can assess if you are on track to meet your investment goals. If you find you are not on track, an investment plan helps you to make changes along the way.
Here are the questions you should ask yourself when putting together your investment plan. Don’t worry, creating your plan isn’t difficult to do.
The first question you need to ask is why you are investing your money. Is it for a house, a vacation, a wedding, early retirement, a child’s college education, etc.? If you plan on investing for more than one goal, this is OK. Write down the various goals but keep them separate and answer the following questions.
In other words, how long will it be until you need the money you are planning to invest? For retirement, you would tend to have a long time horizon, up to 40 years depending on your age. But for a house or vacation, your time frame is going to be much less. The general rule of thumb is to invest in stocks for any goal that is more than 5 years away. Any goal shorter than this should have your money invested in bonds or in a savings account or certificates of deposit.
You have your goal and you know when you need the money. Now you have to figure out how to invest it. I mentioned above that if your time frame is greater than 5 years, you should invest in stocks. But just how much of your portfolio should be in stocks? This is where you have to be honest with yourself. You want to find an allocation that helps you reach your goal, but one that you are comfortable with as well. We all want to sleep at night, right?
If you aren’t sure what your allocation should be, I suggest you check out this questionnaire from Vanguard that will help determine your risk tolerance. One note about taking a risk tolerance questionnaire. Make sure you focus more on the amount of money you could lose versus the amount you can gain. We all will take more risk to earn extra money. But we discount how we will feel if we lose money. When the stock market drops, we freak out because we didn’t assess our risk tolerance correctly.
This is why you need to be honest with yourself. There are no wrong answers when it comes to your risk tolerance.
Of course, you need to know how much money you need to save if you ever want to reach your goal. For a house or a vacation, the amount you need to save is easy to determine. You know how much a vacation will cost you or how much of a down payment you need for a house.
For retirement, it’s a little bit harder. Here is a rough calculation for you to perform that will give you an idea of how much money you need to save:
Figure out how much you spend on a monthly basis Multiply this number by 12 to get your annual spending amount Multiply this number by 25
The answer you get is the amount of money you need to have saved for retirement.
Once you know how much you need to save, you need to figure out how much you can save each month. Don’t give up or become frustrated if you realize you can’t save as much as you need to save to meet your goal. You have time on your side.
Regardless if you can save enough each month or not, you should make it a priority to create and follow a budget. I know some of you hate the idea of a budget, but hear me out. By creating a budget, you can see where all your money is going. This can be a real eye-opener for most people.
When we created our budget, we were amazed at how much we were spending eating out. We enjoy eating out, but didn’t realize just how much we were spending until we created a budget. After you create and follow your budget, you can better assess your spending and saving. Who knows, you might even be able to save more money!
Since the amount of money you need for your goals will differ greatly from person to person, you should save yourself the headaches and just strive to save a set amount of money each year. For most people saving for retirement, your savings amount should be roughly 15% of your income. Saving this amount this is a solid number to help you to reach your long term goals.
For shorter term goals, you can just take the amount you need to save and divide that by the number of years until you need the money. Then divide that number by 12 to get a rough idea of how much you need to save each month.
I know, it’s basic, but we need to cover it. You have all sorts of brokers out there, for most people, Betterment, M1 Finance, and Schwab are your best options. To keep things simple for you, I narrowed the list down to 3. These are the brokers I have found my readers love the most and find are the best to deal with.
Charles Schwab - This is the perfect broker if you have some investing experience. You have the ability to create your own portfolios and you don’t have to worry about high investment fees. They offer every type of investment you would want: Stocks, Bonds, Mutual funds, Exchange traded funds. They make investing simple and straightforward with an easy to use website.
Betterment - For the majority of readers, Betterment is the #1 choice. The reason is simple. They make investing effortless. In just 10 minutes you can have a customized portfolio built for your goals and all you have to do going forward is invest more money. And they have you automate this task, meaning there is zero work for you to do.
M1 Finance - M1 Finance is a new player to the broker world, but they are definitely unique. They allow you to choose a pre-built portfolio or a 100% customized low cost portfolio of ETFs to invest in. And they offer this without any trading commissions. With M1, you invest for free.
Once you have your account open, you need to set up an automatic transfer into your account each month. All the brokers I listed above allow for ongoing transfers. If you want to become a stock market millionaire, you need to invest in the stock market on a regular basis. You can’t just invest $1 and wait for it to become $1 million.
But, if you invest $100 every month and earn 8% annually, it will take you just 54 years to become a stock market millionaire. Now we are talking! The great thing is that I can show you how to reduce the time to become a stock market millionaire even more. Do you want to know how to become a stock market millionaire in just 30 years? Here’s how.
Save $667 per month and invest it in the stock market. The median U.S. income is $59,039 per year. If you make this amount and contribute 10% of your salary into your 401k, you are saving $491 each month. That leaves you with just $176 to invest after tax. Note I didn’t include employer matches in this since some people don’t get employer matches. If you do, then you’ll be a stock market millionaire in less than 30 years.
Set up an automatic transfer to your investment account monthly for $176. That’s all there is to it. If your salary differs and you want to do this yourself, here is your blueprint:
You need to save $8,004 a year to become a millionaire in 30 years. First, save 15% of your income in a 401k plan. If you are not covered by a 401k plan, save 15% in an IRA. Next, take you annual salary and multiply it by 15%. Take this number and subtract it from $8,004. This is how much more money you need to save. Take this number and divide by 12 to get your monthly savings goal.
Many people don’t realize that they pay fees annually on their investments. Every mutual fund and ETF that you invest in, you pay a fee on. You never see the bill for it because the fee comes out of the return of the fund itself. For example, if your mutual fund charges a 1% management fee and your statement shows it returned 5% this year, it actually returned close to 6%. You only earned 5% of that return because of fees.
You might be thinking 5% is good because you’re going to be a stock market millionaire based on Step #3 alone! While this is true, you can get to millionaire status faster by picking low fee investments. And you’ll end up with more money too. Here is an example of how costly investment fees are. Let’s say you have $1,000 invested in a mutual fund that has a management fee of 1.25%. This is about the average for a stock mutual fund. In 30 years after earning 8% annually, you will have paid just shy of $1,200 in fees.
In contrast, if you pay 0.30% in management fees, you will have paid about $350 in fees. Some may be looking at the difference of $850 and not bat an eye. While $850 on the surface might not seem like much, it is. That $850 comes from your investment account. If you left that $850 invested, it would be able to compound upon itself and your balance would grow even faster.
Here are a few key points about fees:
This is your money. Don’t give it up so easily.
Risk and reward are related when it comes to investing. The higher return you want to achieve, the more risk you are going to have to assume. It’s the nature of the beast. By diversifying your investments, you take away some of the risk and still earn a good return.
Stocks tend to earn a higher annual return than bonds and are also more volatile. What this means is that stock prices tend to rise and fall quicker and in larger amounts than bond prices do. If you invested in just stocks, you could earn as much as 51% in one year or lose as much as 37% in one year. With bonds, you could earn as much as 17% in one year or lose as much as 11% in one year.
Most investors wouldn’t like it if they had to choose between these two. This is where diversification comes into play. If you were to create a portfolio of 50% stocks and 50% bonds, your potential one year gain drops to 32% while your potential loss drops to a loss of 17%.
Of course, diversification doesn’t stop there. There are all sorts of stocks you can invest in. Small cap, large cap, growth or value stocks, domestic or international, etc. For bonds, you can invest in long-term or short-term bonds, government or corporate bonds, or even junk bonds.
All this diversification has an impact on your returns. The goal of diversification is to allow you to earn the highest return with the least amount of risk. Realize that there are limits to diversification. You can get to a point where you are too diversified. Plus, you can’t diversify away 100% of the risk in the stock market. There will always be risk present.
But the bigger question is if you are already investing, how do you know if you are diversified right now? And how do you go about making some changes to help you get to an ideal mix?
Personal Capital is a great free tool that allows you to see your current asset allocation and make adjustments. Just link your accounts and you’ll get a detailed analysis. In just a few minutes you will know what moves you have to make to become diversified.
Chasing returns doesn’t work. When you chase returns, you cost yourself money through commissions and trading fees. At the end of the day, you end up in a worse position than you would be in had you just stayed invested. This is why the average investor only earns a 2% return.
Chasing returns is akin to Wile E. Coyote chasing down the Road Runner. He does every possible thing to catch the Road Runner and every time he comes up empty. Same idea applies here. If you want to be a stock market millionaire, you can’t chase returns.
Don’t be Wile E. Coyote. Another reason why chasing returns doesn’t work is because we base investment decisions off of past performance, even though investment professionals tell us not to. Back during the dot-com boom, I made this fatal mistake. I invested in a tech mutual fund that earned over 60% in the prior year. The year I invested in it, the bubble burst and I lost close to 60% of my investment. I never chased returns again.
For me, slow and steady always wins the race when it comes to investing. After the stock market collapse of 2008 many investors fled the stock market. Some investors have come back into the market, but many investors have not come back at all. Those that didn’t come back have missed out on one of the greatest bull markets ever. The market is up over 300% as of this writing from the lows in 2009. You would have made all your money back and a lot more had you just stayed invested.
When I was working for a financial planning firm, most of our client’s portfolios were back to pre-crash levels by 2012. They were scared during the crash, but they knew they were better off staying in the market versus selling everything. You have to stay invested in the market, in both good times and bad.
Following these proven steps will put you on the path to becoming a stock market millionaire. The most important things are to start investing early, invest regularly through automatic transfers, minimize fees, diversify your portfolio, and remain patient. Staying invested for the long run is key. While it may seem like a long process, if you follow the steps outlined you are almost guaranteed success.
Remember that investing your money takes less work than you think once you have laid the proper foundation. So take the time up front to create your plan, choose your investments, and automate your process. Then sit back and watch your wealth grow over the decades. I hope this guide has given you the confidence to get started investing today and building your path to stock market millionaire status.