The right strategy can help you create life-changing wealth.
Which is a better investment: buying a home or investing in stocks?
Since 1995, stock prices have outperformed home prices by a factor of four, but which is actually the better investment for building wealth?
The stock market is a wealth-building machine, and with the right strategy, you can turn small, recurring contributions into a multi-million dollar portfolio.
Your earning potential depends on where you invest and how much you can contribute each month. But even investments that don’t have very high returns can still pay off over time. Here’s how much you need to invest each month to save $2 million in the stock market.
Where you invest matters
Of course, you can reach $2 million faster with higher-yielding investments. But that doesn’t mean you have to take unnecessary risks to get there. Relatively safe investments can generate life-changing wealth, even if it means giving your money more time to grow.
To keep things simple, let’s assume you’re investing in the S&P 500 ETF. This type of investment tracks the S&P 500 (SNPINDEX: ^GSPC)owns stock in 500 of America’s largest and most powerful companies.
The S&P 500 is widely considered a major pillar of the overall market, making it a strong choice for those looking to build long-term wealth with less risk. And because we invest in 500 companies across every sector of the market, you can instantly achieve a diversified portfolio with little effort.
What does it take to reach $2 million?
Historically, the S&P 500 itself has averaged an annual return of about 10%. In other words, annual highs and lows have averaged about 10% over several decades. Because the S&P 500 ETF aims to replicate the performance of the index, this type of investment may have similar returns over the long term.
Assuming you earn an average annual rate of return of 10%, here’s the approximate amount you’ll need to accumulate $2 million, depending on the number of years you need to invest:
Data source: Author calculations via investor.gov.
S&P 500 ETFs can be a smart choice for those looking for a relatively safe investment with less short-term volatility, but these funds track the market, so they only provide average returns.
Some ETFs, such as growth ETFs, are designed to beat the market, and even slightly above-average returns can potentially make you exponentially more profitable over time. However, these funds do come with some risk, so it’s wise to consider your priorities to determine whether it’s a worthwhile trade-off for greater return potential.
Regardless of where you invest, a long-term outlook is key to maximizing your returns in the stock market. By starting now and contributing as consistently as possible, you could earn more than you think.
Katie Brockman has no position in any stocks mentioned. The Motley Fool has no position in any stocks mentioned. The Motley Fool has a disclosure policy.
The Motley Fool is a USA TODAY content partner providing financial news, analysis and commentary designed to help people take control of their financial lives. Its content is produced independently of USA TODAY.
