Now that we’ve covered the connection between income, expenses, savings rate, and investment growth to the number of years it will take you to save $ 1 million, I want to share the investments that helped me get there in 5 years between 2010 – 2015. While I am a huge advocate of index fund investing and recommend that most people invest for the long term using index funds, between 2010-2015, I was also investing in individual companies that I believe in, like Amazon, which happened to increase an insane amount in value over that time period.
I typically only recommend that you invest less than 10% of your portfolio in individual stocks if you are new to investing, I currently have about 50% of my portfolio in individual companies, because the total percentage of stocks as a percentage of my overall portfolio has gradually increased to this level as the stocks I’ve invested in have risen in value. I also happen to believe in the long-term potential of the individual companies that I’ve invested in.
Get an Education in Investing
FYI, here’s the best two books I’ve ever read on index fund investing that you should definitely check out to get more background on the strategy The Bogleheads’ Guide to Investing and The Coffeehouse Investor: How to Build Wealth, Ignore Wall Street, and Get On with Your Life.
Did I get lucky over this five year period? Definitely – there is no way anyone can predict the stock market returns of the future and I happened to start investing at a period when the market was low and it has gone on to grow considerably over the past 7 years. The US stock market was on a complete tear during this period and still continues to grow until this day.
Build Your Investment Portfolio
Many people who have kept their cash on the sidelines (outside of the market) in recent years have been asking are stocks too expensive, but have missed out on big gains while doing so? I am still almost entirely invested in stocks for the long haul and I’ve been happy to see how much more my portfolio I’m about to show has grown even over the past 2 years.
But while you can’t know if you will get lucky, you can certainly set yourself up to take advantage of luck if it happens, or if it doesn’t, your investments will continue to grow consistently over the long-term. Alright, let’s check out my investments and portfolio growth from back in the day when I was able to go from $2.26 to over $1 million saved in 5 years.
Invest as Much Income as Possible
During this period I saved and then invested an average of $144,500 per year – which is a lot but was the primary reason I was side hustling so hard. Note that I didn’t just save the money in a savings account (where returns are often really low and you are likely to lose money to inflation), I invested as much money as I could into the stock market.
Some of my investments during this period were pre-tax (in a 401k and SEP IRA) and other was post-tax (Roth IRA with a traditional conversion) and after-tax investment accounts. My average income during that period was approximately $257,000, so while my savings rate fluctuated throughout this period, sometimes going as high as 80%, my total average before-tax savings rate across that 5 year period was closer to 56%. I always calculate my savings rate as a percentage before-tax, but you can also do it after-tax as well. If I did it after taxes, then my savings rate during this period would be closer to 80%.
A few notes. The Vanguard Total Stock Market Index Fund returns (with dividends reinvested) was 13.53% – so considerably higher than the 7% average used in the calculation examples earlier in the post. An average return of 13.53% is insanely strong performance and well above the average annual stock market returns over the past 100 years.
But investing in the Vanguard Total International Stock Index didn’t yield any gains. I was and still do, invest in this fund to add more diversification to my portfolio. Although, the current share price as of this writing is $29.92, so it has gone up in value over the past two years.
Invest in Stocks with Growth Potential
Also, both Amazon and Facebook stocks went on a tear during this period. Amazon ended 2010 at $180 and by the end of 2015 had increased $675.89, a 275% increase in value. With Facebook stock, it started 2013 at $26.62 and ended 2015 at $104.66, a 293% increase. Also note that during this 5 year period, I was continuing to contribute to most of these investments.
Amazon ended 2010 at $180 and by the end of 2015 had increased $675.89, a 275% increase in value. With Facebook stock, it started in 2013 at $26.62 and ended 2015 at $104.66, a 293% increase. Also note that during this 5 year period, I was continuing to contribute to most of these investments. Combining all of the investments the $743,125 that I invested during this period grew by 68.07% to a final portfolio value of $1,248,973 in November 2015.
So I was able to make $505,848 in investment gains over a 5 year period or $101,169 per year! While this portfolio growth is pretty likely unsustainable long term, the past 2 years have also been strong so my investments continue to grow and are the foundation for my early retirement – where I project that I will be able to live off of 4% of the portfolio each year for the rest of my life. Even during the years when my investments have grown by 15%+, I still plan to be able to live off the 4%+(2-3%) inflation, so I can keep some of my investment gains in my portfolio compounding well into the future.