There are multiple paths to the same destination. It’s important to find what works best for you.
If you want to retire a millionaire, you have to first get that first $100,000 under your belt. It’s not easy, so congratulations if you’ve reached that milestone already! It’s a big deal because that’s where the magic of compounding can begin to take hold and do the heavy lifting for you.
A $100 return on $1,000 is the same percentage-wise as a $10,000 return on $100,000. Yes, compounding is more fun (and noticeable) with larger numbers. Eventually, your money grows faster from your returns than what you add.
Yet, the journey is not over. If you have $100,000 today, it still must increase tenfold for you to retire a millionaire. Fortunately, you have numerous paths available to reach that goal. Here are three ways to grow your $100,000 into a million-dollar nest egg.
1. Diversify and chill with index funds
Keeping it simple is often best, and it doesn’t get much simpler than investing in index funds, which are an easy way to diversify your investments as they track a basket of stocks. For example, the S&P 500 index, arguably the most famous stock market index, includes 500 of America’s most prominent companies. The S&P 500 has been around for generations and has generated annualized returns of about 10% over the past 50 years. You can invest in funds like the Vanguard S&P 500 ETF, which track the index.
You won’t “beat the market” with such an investment, but there is nothing wrong with simply going with the market. Even most professional hedge fund managers fail to outperform the S&P 500 over time. If an investor put $100,000 into an S&P 500 index fund and generated 10% annualized returns, it would grow to $1 million in approximately 25 years.
2. Get more aggressive with growth stocks
You could consider investing in growth stocks to get more aggressive and potentially generate higher returns to reach your goals faster. These companies, often in the technology sector, grow faster than the average business. They might be at the forefront of new industries, like cloud computing and artificial intelligence.
If you don’t want to pick individual stocks, you could look at the Invesco QQQ Trust, an exchange-traded fund that focuses on growth stocks. It has outperformed the S&P 500 index since its inception in the late 1990s.
QQQ Total Return Level data by YCharts
However, growth stocks often command higher valuations and are subject to sharper declines when the broader market isn’t doing well. You can see below how the Invesco QQQ tends to fall further on market downturns.
QQQ data by YCharts
If you want the potential for higher returns, you must also stomach increased volatility.
3. Buy blue chip dividend stocks and DRIP
Sometimes the tortoise wins the race, not the hare. In investing terms, a slow and steady business that grows for decades can make you a lot of money.
I’m talking about blue chip dividend stocks with mature business models that make more profits than they need to invest in the business, so they share the extra cash with shareholders. Companies like Coca-Cola, Procter & Gamble, and Johnson & Johnson would fit this description. All three are Dividend Kings, meaning they have raised their dividends for at least 50 consecutive years.
Investors can use a dividend reinvestment plan (DRIP) to supercharge their returns. Look at the difference reinvesting dividends can make over the long term (price versus total return).
KO data by YCharts
The coolest part about investing in dividend stocks is that you can live off the dividends once you retire instead of reinvesting them. If your portfolio is large enough, you might live off your dividend income without selling your stock. It could take longer for compounding to wow you with dividend stocks rather than growth stocks, but your wealth-building journey will be less stressful, and you may never need to sell your shares. That sounds like a good plan.
The ultra-important takeaway point
Building a retirement nest egg is a unique journey for everyone. There’s no right or wrong path.
Just remember how much work went into getting to that first $100,000 (or how hard it is if you’re still building toward that goal). Don’t let yourself grow impatient or get caught up in the market’s ups and downs. Greed and fear can tempt investors into mistakes. When it comes to your nest egg, it’s arguably more important to avoid the catastrophic error than hit a home run in your portfolio.
Don’t be afraid to play it safe and focus on consistency and minimizing stress. If you build your portfolio right, time and compounding will take good care of you.
Justin Pope has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool recommends Johnson & Johnson. The Motley Fool has a disclosure policy.
