How to be a mil­lion­aire

EAS­IER THAN YOU THINK: TIME AND PER­SIS­TENCE NEEDED

The Citizen (KZN) - - Business - Patrick Cairns

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.

Size mat­ters

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.

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