If you just so happen to have, say, a hundred-thousand dollars laying around and you aren’t really sure what to do with it — you can always donate it to me, of course — you might be able to take that cash stash and wave a little magic wand and turn it into a seven-figure nest egg for retirement. Okay, so magic wands won’t really give you a million bucks, but properly investing in the right stocks might.
The key to success in such an endeavor is a combination of knowing how much time you have and what action you take with the money in your possession in the meantime. If you lots of time AND lots of money, you can take $100,000 and turn it into a cool million.
According to The Motley Fool, one of the first ways you can do this is through owning quality growth stocks for a period of 25 to 30 years. If you are the kind of person who likes to see instant results, well, investing might not be for you. Buying and investing in stocks is a long game. It requires a mountain of patience.
Many new investors start their journeys by buying some of the market’s most popular growth stocks. And understandably so. These tickers (by definition) are expected to continue growing in value.
They’ve also got a collective track record to justify this interest. Over the course of the past 30 years the S&P 500 Growth index has outgrown the S&P 500(^GSPC 1.11%) by nearly half as much more than the market’s most-used benchmark gained during that period. Sticking with growth stocks for the entirety of this span wouldn’t have been easy for investors, however.
See, while the S&P 500 feels volatile, it’s not nearly as volatile as the S&P 500 Growth Index and its underlying stocks are. They’re so volatile, in fact, that at times it would have been tough to stick with many of these names. And if you can’t stay in stocks when things get ugly, you risk missing out on most of their upside. That’s because stocks’ biggest gains often come immediately after their biggest sell-offs, and right at the very beginning of new bull markets… when many investors still don’t believe the bear market is over, and are therefore on the sidelines. Big mistake.
Another strategy you might employ to take your $100,000 and make it a million is through buying up some regular, plain old dividend stocks. You’re probably raising your eyebrow quizzically as you read that sentence for a second time. After all, don’t these kind of stocks tend to be shares of companies with slower and lower growth?
But, don’t dismiss the upside of slow and steady value-creation in the form of cash — particularly when the companies in question are in the proven habit of raising their dividend payouts. These quality stocks ultimately tend to outperform their non-dividend-paying peers. Mutual fund company Hartford did some data-mining on the matter, determining that in the 40-year span from 1973 to 2023, the more willing and able a company was to pay a dividend, the better its stock performed. These stocks also tend to be less volatile (lower beta), making them even easier to hang onto when things become turbulent for the market.
For reference, reinvesting the dividends paid by the highest-quality dividend stocks returning (net) on the order of an average of 9% to 10% per year would grow $100,000 into $1 million in roughly 25 years, a result that’s in line with growth stocks’ historic long-term returns.
Okay, what’s the catch?
There is a bit of a catch, I’m not going to blow smoke up your nostrils. The catch is you actually do have to reinvest the dividends into more shares of those dividend-paying names in order to get these kind of returns. According to data released by Hartford, over the last several decades, dividends actually accounted for a third of the S&P 500’s net gains, and ever since the flower power age of the 1960s, reinvested dividends drove 85 percent of the index’s cumulative returns.
“Just know that most of these net gains will come closer to the end of any time frame than to the beginning of it,” the Fool says.
Thirdly, you can reach your goal by owning “the market” through having an index fund or two for a period of about 30 years. Again, think big picture, think long-term. This approach is sort of a hybrid of the previous two. It’s fairly simple and comes with essentially no maintenance. You could simply own the market through an index-based instrument such as the SPDR S&P 500 ETF Trust, which typically mirrors the performance of the S&P 500’s performance.
This isn’t the most exciting route to take, but it also avoids a lot of the hassles that come along with being an investor in our day and age. One of the problems this helps you get around is that if you purchase and hold onto an index fund, you don’t have the temptation of trying to perfectly time a trade’s entry or exit. You’re plugged into the overall market’s long-term performance, which, on average, sees a gain of around 10 percent a year.
Yes, some years are better while others are worse. In that you know you can’t know when these near-term ebbs and flows are going to take shape though, you don’t even bother trying. You simply let time work its magic over the course of two to three decades, smoothing out all the market’s highs and lows that surface in the interim en route to growing $100,000 into $1 million.
Another upside: This strategy also allows you to avoid making constant check-ins on your stocks or the market’s current condition. Such check-ins often spur impromptu buying and selling you may not really want to do, but feel like you have to at the time just because you’re already looking.
There’s another option available for you to consider. Do all three of these things. Start out by investing in a foundational index fund, then buy a few dividend stocks, and sprinkle a few growth stocks on top like sprinkles on a chocolate sundae — preferably ones that you really believe will still be doing well later down the road — and you have yourself a decent portfolio.
Just notice the common thread in all three strategies. That’s time — in all three scenarios above, the path to turning a small six-figure sum into a $1 million retirement nest egg took 25 to 30 years, depending on the market environment at the beginning and then at the end of the time frame. Giving yourself enough time to achieve the goal is far more important than whatever stock-picking strategy you use. Conversely, not giving yourself enough time to meet your investment goal is the biggest investment risk you can take.
Good luck and happy investing!