How to be a millionaire
EASIER THAN YOU THINK: TIME AND PERSISTENCE NEEDED
The return you’re able to get on your investment isn’t the most important factor to reach your goals.
Investing is often presented as something complicated. Trying to make sense of the range of products available, the different asset classes, and the relationship between risk and return can be daunting to a lot of people.
In reality, the basic principles are extremely simple:
Start as early as possible. Save as much as you can. Be patient, and let time work in your favour.
To illustrate this, Morningstar put together some data on what it takes to save your way to R1 million.
Show me the money
“The analysis used a range of return outcomes varying from the current return investors can achieve by putting their money in a bank account up to a maximum of 17% per annum,” explained Victoria Reuvers, senior portfolio manager at Morningstar Investment Management.
“Realistically, many investments can deliver higher returns in short periods of time, but 17% per annum was considered a large annual return and a prudent maximum, as delivering such a strong outcome would require some meaningful risk-taking.”
The findings are presented in the table.
Even at just R200 a month, and at the lowest rate of return, it’s possible to become a millionaire within the average South African’s lifespan. It would take just under 63 years to get there.
These numbers are even more powerful using the return an investor could reasonably expect from a local balanced fund.
It’s fair to assume these unit trusts can deliver a 10% return per year over the long term.
If someone contributes just R500 per month and receives that rate of return, it would take less than 30 years for them to become a millionaire.
This shows that at an undemanding monthly contribution and at an extremely realistic potential rate of return, becoming a millionaire is simply a matter of time.
The second observation is perhaps even more powerful. It’s illustrated by the column furthest to the right, which considers what happens when an investor makes R10 000 per month contributions.
At this contribution rate, it would take just seven years to reach R1 million, even at the measly return of just 5%.
But the higher rates of return don’t get you to R1 million exponentially faster.
Doubling the rate of return from 5% to 10% only shaves 9.5 months off the time it takes to become a millionaire. Tripling it to 15% speeds up the process by just 1.5 years.
This is something many investors fail to appreciate. Almost always, the main focus in any investment discussion is on the return.
That leads to extreme views such as thinking you must take all your money offshore, or invest in a particular stock or sector because it’s the next “big thing”.
However, the return you’re able to get on your investment isn’t the most important factor when determining whether or not you reach your goals.
If you want to get to R1 million, the surest way of speeding up that process is to save more.