Being a millionaire today has lost some lustre. Global economies are experiencing inflation, and the value of $1 today has very little purchasing power compared with the $1 of yesterdays. When we really think about it, any one of us could spend a million pretty easily. Recently in my hometown a business spent a million dollars on a three day “dream festival”. By the time they paid for the speakers and threw a couple of really swanky private parties it became clear how they could have spent that money in a matter of three days.
Think of a mining operation – how quickly can they blow through a million dollars?
What proves to be more challenging is saving a million dollars. It seems impossible, but in actuality, it can – and continues – to be done.
Mutual funds can make someone a millionaire, but it takes years of dedicated saving and investing to achieve this. As a second generation mutual fund adviser, I have already seen clients who have saved and invested their way to a portfolio valued at over a million dollars. These clients come from all walks of life, but managed to put a couple of investing tools to work for them.
The first investing tool that can bring a mutual fund investor to a million dollar portfolio is compound interest. If someone invested $1000 for two years into a mutual fund and earned, as an example, a steady ten percent for two years, they would have $1000 X 10 percent for $1100 in the first year, and by the end of the second year they would have ($1100 + $1000) X 10 percent = $2310.
If you continued this calculation it wouldn’t be difficult to figure out how to get to a million dollar portfolio. Now, over the lifetime of your portfolio you might not earn ten percent, but I used this as an example.
The other tool helping you along to a million dollar portfolio is the reinvestment of distributions. Companies often times offer their shareholders an income distribution in the form of shares. Mutual funds are no exception, they too receive distributions. Rather than take these distributions as income, they can be reinvested in the portfolio, allowing investors to purchase yet more shares.
If an individual continued to invest their money, reinvest their distributions, and take advantage of compound interest, then they could become a millionaire strictly through mutual funds.
Mutual funds could also help someone become a millionaire if they had other assets as well. Someone might own half a million in property and then build up a portfolio of mutual funds value at half a million. In a case like this, mutual funds help the person become a millionaire.
People do diversify their investment types. If you subscribe to the theory of multiple streams of income, then you can understand how people might hold various types of investments – real estate, stocks, mutual funds, etc. – to create a million dollar portfolio.
The key to remember when reaching for the million dollar mark is that you have to be patient, ride out the stock market turbulence, allow compound interest to work for you, and reinvest those distributions.
Then sit back, and enjoy your wealth.