People have been trading stocks since the 1600’s. Some have lost much, while others have made a fortune. The real question is, can you become a millionaire off stocks? As with many things in life, the answer is “yes and no”. There are no guarantees in the stock market, so it’s quite obvious that not everyone will become a millionaire. But, if we look at history and study the best practices of those that did make millions in the stock market, we then have a chance of becoming millionaires ourselves.
When people approach me and and ask how they can get rich quick in the stock market, they have already failed in my book. If one wants to grow wealthy, the absolute best way to do it is slowly (hint: this is why various popular PF blogs have “get rich slowly” as their tag names).
Typically, those that want to get rich quick in the market end up buying different “secrets” from millionaire investors that have supposedly discovered something new that no one else in history has. They promise gains from 20% all the way up to 50% or more annually, but the truth is, these are the gains they are earning from chumps like you buying their books and software.
Get rich quick schemes are often very suspect and risky and should almost always be avoided.
The More Proven Method to Become a Millionaire Off Stocks
Okay, so it’s best to get rich slowly, but how is that typically done? Follow these steps and you’ll have increased your odds of becoming a millionaire off stocks.
1) Start Early
One of the best ways to earn large sums of money in the market is by starting early to capitalize on compound interest. Albert Einstein himself even called compound interest “the greatest mathematical discovery of all time.” If Mr. Einstein got that excited about compounding, then so should you!
If a 20 year old woman found herself with $10,000 and decided to invest it in the stock market, there is a chance that she could earn an average of 12% per year. In the first year, she would make $1,200 off her investment, which would leave her with $11,200. So far, this doesn’t sound like millions does it? Ahh, but here comes the power of compounding!
In the second year, she reinvests not just the original $10,000, but she adds the earnings as well, and 12% is earned on the full $11,200, which then earns her more than before, $1,344. Now she has $12,544. By investing that full amount, she then earns $1,505 in the third year, $1,686 in the fourth year, and $1,888 in the fifth year! Can you see how much her money is compounding already? Over the course of just five years, she will have almost doubled her money! By reinvesting her gains every year for 50 years, she will find that her investment has grown to $2,890,022!
You may not be twenty years old, but you can still benefit from the power of compounding. Start investing as soon as you can!
Can you become a millionaire off stocks? As we discovered already, it’s best if you start early, but it’s also important to diversify your holdings. In other words, you don’t want to just purchase stock in one company. Sure, it might appear that it’s on course to grow for the next 30 years which means the stock price will likely skyrocket, but there is always that possibility that it doesn’t. In fact, they could even go bankrupt, which would leave you with zero dollars in your investment account.
If you want to shield yourself from large losses in the stock market, you’ll obviously want to buy stock in more than one company, and you should invest across multiple industries as well. This way, if one industry earns very little one year and the other earns a great yield, then you’ll still earn a decent return.
One of the best ways to diversify today is by investing in mutual funds. These funds are simply a conglomerate of a bunch of different stocks and are managed by a team of researchers and analysts. If they believe a company has upside in their stock price, they’ll invest in it. If they see a company going south, they’ll sell out of it. This is of great benefit to you, the investor, as you can invest in one place and still be diversified.
3) Keep Your Fees Low
There aren’t too many people that think about the fees of their investments, but they can make a significant impact on the overall gains. Remember our initial example of $10,000 becoming $2.89 million? This was made possible with 12% earnings. However, as is the case with many investments, there are typically fees tied to each investment. If you have a broker, there are probably fees for his/her services. There are fees for investing in various funds. And, there are often fees for buying and selling shares of stock.
Let’s say your broker charges you 1% of your portfolio for his wisdom, and the funds you have invested in cost an average of 1% as well. Now, instead of earning 12% on your $10,000, you are really only earning 10%. This shouldn’t be that big of a deal, right? Wrong. By reducing your earnings by 2% per year, your total payout after 50 years will no longer be $2.89 million, it will be reduced drastically to $1.17 million. OUCH! Can you earn millions off the stock market? Yes, but you have to watch the fees.
There are many mutual funds out there that have earned a consistent return and have fairly low fees, but if you really want a hands-off approach to investing with low fees to boot, start looking into index funds. These funds cost only 0.2% or less and you probably can invest in them online without a broker. By investing this way, you may become closer to that million dollars you’re looking for.
4) Stay Consistent
The final piece to the puzzle is consistency. I understand that many of us don’t have a lump sum of $10,000 to invest and leave in the market for 50 years. Instead, we should all be investing hundreds of dollars each month for twelve months a year and for many years in the future, and we should never pull any money out during this period either.
You may not have $10,000, and you probably don’t have 50 years. But, what if you can invest $309 per month for the next 30 years and earn 12% each year? Then you will become a millionaire as well. Yup, this scenario would earn you exactly $1 million, and all it takes is consistent investments.
Can you become a millionaire off stocks? You sure can, but you must start early, diversify, keep your fees low, and stay consistent. As with anything, there aren’t any guarantees, but by following these four rules, your chances of reaching a million should greatly improve.
What do you think? Can you become a millionaire off stocks?
This post was originally published on May 14, 2015 and updated on June 18, 2021.