How to Build a Million Dollar Portfolio

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Getting our money to match our dreams

Financial goal setting becomes a critical element to determining how we can reach our life goals or retire successfully. It is easy to believe that investing in the “markets” will automatically yield that $1 million paycheck when we are ready to retire in 25 to 35 years. I wish this was true for everyone.

Unfortunately, the markets don’t work that way, and nor do our lives. Reaching any monetary goal takes time, effort and a little bit of knowledge. But, it can be done.

I know. Most times our lives don’t go as planned. Our goals or dreams tend to fall by the wayside and harsh reality sets in. I find we get ourselves in this situation for a few reasons:

1 – Sometimes we lack the goal, itself – Retiring is a great goal to have, but quite honestly if we don’t have much more than that to look forward to, then we become less incentivized to save for it, except for the incentive of not working where we are now. Sounds scary, but it’s true. A big part of life is not just having a purpose, but having a passion, something to say “My life was worth living.” For those of you who lack clear goals or any goals at all, there are dozens of books that help gain clarity, including Finding Your North Star by Martha Beck (it may be a little sappy, but may be worth it when it helps you find what you’d love to do).

2 – We lack the persistency. We tend to forget. We lose sight of what we want, and go about our day without knowing what we want to accomplish. One simple solution: Write what you want to do or where you want to be in 20 or 30 years on a piece of paper and frame it next to your bed or somewhere where only you will see it on a daily basis, where it can be kept fresh and clear. Also, be as specific as possible. This will remind us where we want to go.

3 – We lack the drive and discipline. I am sure we all have the power to get what we want, but we often get distracted by the insignificant details. For instance, how are we going to save money for our future if we neglect our retirement plans and spend every penny of new clothes, HDTVs, or iPods. It’s hard. I know. We live in a consumerism world. But we still have a choice to make new changes, and to live life differently from others. Let’s refocus our efforts on finding a new balance between what we really need today and what we want for our future.

4 – Finally, we lack planning. For instance, we want be a millionaire or we desire to retire to Europe. But we dream it like winning the lottery. Science has confirmed that by putting that pathway, one that is step by step, on paper, it will more likely result in achieving your goals. We can not just say “this is our goal but who knows how I am going to get there.” We need to physically map out our pathway to getting to our financial goals in order to achieve that. That means (1) figuring out the returns we already achieved, and (2) expanding that over the next 20 to 30 years.

Now that we have a map, let’s take our goals and ask ourselves “Are we going to make it with our current investment choices?” Or another way of looking at it is, “Will our current returns get us to our life goals?”

What to do?

Investing in the markets is simply a pathway to helping fulfill some of those goals. Right now, write down some of your life objectives, and find out what the true costs to achieving them are.

Take pen to paper to say “If I want to retire to that place or do this when I am 60 instead, I need to fill in the gaps.” Or more specifically, it asks us how much we have now and where do we want to be. We should address questions like:

1) What do I have to earn to get there?

2) What do I have to save to get there?

3) What type of return in the market must I achieve to fulfilling those goals?

Sometimes this can be done with a little more risk, and sometimes it takes a greater amount of risk, depending on your goals and your financial situation. And this is how risk tolerance should affect your life. Will you get there earning 3% or 5% or 8% or more a year? Depending on your circumstances and your financial goals, the reality is that you may need to think about shifting your risk tolerance level slightly to achieve a higher return to make your goals possible.

To see this point visually, let’s go through an example of several different portfolios each worth $10,000 with 4 different returns over the same 30 year period.

Initial Expected

Investment Return Years Outcome

$10,000 3% 30 $24,568

$10,000 5% 30 $44,677

$10,000 8% 30 $109,357

$10,000 12% 30 $359,496

By looking at this table, you should readily see several things. Having a higher return is vital to a larger outcome, while conservative investments will lead to conservative returns.

Secondly, starting or building a larger initial investment, or more importantly, contributing to your initial base quicker is essential. You must start as early as possible to achieve your desired outcome. The longer you wait, the less likely you will be able to fully retire.

The Two Elements Needed to Build a Million Dollar Portfolio

For argument sake, let’s say we change our financial commitment today, wise up, start as early as possible, and even decide to help grow our investments by contributing $200 to our investments every month, here’s what you get:

Initial Expected Monthly

Investment Return Years Contribution Outcome

$10,000 3% 30 $200 $141,407

$10,000 5% 30 $200 $211,812

$10,000 8% 30 $200 $409,416

$10,000 12% 30 $200 $1,065,497

Just by introducing this one technique of adding a monthly contribution to our investments, we have been able to supersize our outcome. So at a 5% return over 30 years with a $200 monthly contribution, you will achieve $211,812. That is $150,000 more in your pocket by making a monthly contribution.

While we can enjoy an even larger outcome remaining conservative and making monthly contributions, our investments still won’t get us to a million dollar portfolio until we also concentrate on achieving a higher return. These 2 elements, a monthly contribution and a higher return, must go hand in hand in order for us to allow us to grow to a million dollar portfolio.

As the table shows, a 12% rate of return over 30 years and a $200 monthly contribution will achieve $1,065,497 – our million dollar portfolio. Is this possible? One statistic by the investment guru John Bogle shows this rate of return not only happened, but was achieved over a recent 25 year period between 1980 and 2005.

While future performance is not indicative of past performance, we can only hope that American innovation continues to make a substantial contribution to economic growth so similar past returns can continue.

I specifically wrote Cheap Lee’s Guide to Investing to help identify and achieve those higher returns because higher returns will make a significant difference to your future. I have also covered ways to help reduce your risk, depending on your current investment choices. Finally, I have included a special bonus section on 17 Ways to Save Money Now so you can have that extra $50, $100 or even $200 a month to put toward actively growing your wealth.

So it comes down to educating yourself about what financial goals you have and how you intend to achieve them. But there is no magic trading system. No one can offer, or furthermore guarantee, better returns without more risk, including what I cover. You and you alone have to decide if you want to make this happen.

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