Given the right time frame and return, it's possible to make $1 million starting with a small amount of money.
It seems crazy that it can be so passive, however it can be done with the right ingredients.
Average market returns
The S&P/ASX 200 Index (ASX: XJO) has returned an average of 26% per year over the last 40 years. Between 1980 and 2020 it has grown by about 1,040%. If we divide this by 40 years, we get 26% per year.
The crazy thing is that these returns include major crash events such as "Black Monday" in 1987, the "Dot Com Bubble" in 2000, the "Global Financial Crisis" (GFC) in 2008 and more recently the COVID-19 crash in 2020.
When you think about it, an average return of 26% is actually pretty great, all things considered!
However, in recent times, we can't rely on 20%+ returns. The average annualised return in recent decades is closer to 8% per year. But the compounding effect can be incredible.
What would it take to turn $10,000 into $1 million?
Turning 10 thousand into a million requires a number of factors, including time and percentage return.
Firstly, starting with $10,000, let's assume that over the long-term we can see an annual average return of 8% in the major ASX index.
Secondly, we need to include a regular deposit or investment into the market. In this case, I have used $500 per month as this is reasonable for most people. It's still a commitment of course, but we are talking about making a million dollars.
Lastly, we need time in the market to compound our returns.
Let's review:
- Starting amount – $10,000
- Average return – 8% per year
- Regular deposit – $500 per month
Now we have our ingredients, how long would it take?
Surprisingly, it takes only 33 years to make $1 million!
In fact, after 33 years, you have more than $1 million, you would have approx $1,039,965.
It's crazy to think that all it takes to achieve this is a $10,000 starting amount, some time and some commitment. All we need now is a product.
What to buy
In keeping with the theme of average market returns, the easiest and most accurate way to track the market is through exchange-traded funds (ETF)
ETFs that track a major ASX index are the ones I'm looking at here, as they are designed to match the long-term growth we have estimated.
There are many ETFs available on the ASX to choose from.
BetaShares Australian 200 ETF (ASX: A200)
The Australian 200 ETF by BetaShares is designed to provide exposure to the top 200 companies listed on the ASX by market capitalisation.
At just 0.07% per year in fees, it's one of the cheapest ETFs I've ever seen.
Aside from growth in value over time, this ETF offers approx 4.7% in annual dividends as well.
The top 3 sectors held are:
- Financials – 27.3%
- Materials – 20.6%
- Healthcare – 11.9%
The top 3 holdings in this ETF include CSL Limited (ASX: CSL), Commonwealth Bank of Australia (ASX: CBA) and BHP Group Ltd (ASX: BHP).
Vanguard Australian Shares Index ETF (ASX: VAS)
The Australian Shares Index ETF by Vanguard is designed to track the returns of the S&P/ASX 300 Index (ASX: XKO).
This particular index is essentially the ASX 200 plus another 100 companies. I like the idea of a little more diversity.
At 0.10% per year in management fees, again, this is a very cheap ETF. While it's not critical to shop around for cheap ETF's however, it should be noted that lower fees mean your returns will be higher.
Even though this fund has more than 100 more companies than the Australian 200 ETF by BetaShares above, the top sectors and holding are identical.
Foolish Takeaway
33 years might seem like a long time to make $1 million, however it's a very passive approach. This article is deigned to inspire and show you that anything is possible with the right planning. For those wanting to speed up the process, a higher starting amount, higher monthly deposits and a slight increase in return can drastically reduce the time frame.
One of the most important things is to just start. Even if you have less to invest and less available each month to contribute, every bit counts towards a brighter future. Your future self will thank you!
