One million pounds is a lot of money. It’s more than enough for most people to retire on, and becoming a millionaire remains a long-term dream for many.
That’s why I’ve chosen one million pounds as the new long-term goal for the UK Value Investor model portfolio.
Of course, any idiot can set a goal. What matters is whether or not you can achieve it.
Is a million pound portfolio an achievable goal?
I’m a fan of SMART goals, which are Specific, Measurable, Achievable, Relevant and Time-bound.
One million pounds is definitely specific and measurable. It’s also relevant as it will produce a nice retirement income given an entirely realistic dividend yield of say 4% (for a £40,000 annual dividend income).
But is a million pound portfolio really achievable before retirement at 65?
Of course, it depends on when you start and how much you start with.
If you inherit £500,000 when you’re 18 then reaching one million pounds by the age of 65 is going to be pretty easy.
But if you’re still at zero when you reach 50 then achievable may not be the best word to describe your millionaire dream.
So where am I starting from?
In terms of my model portfolio, the answer is £50,000. That was the value of the portfolio when I launched it back in 2011.
I chose £50,000 as the starting point because I think that’s a reasonable minimum size for an actively managed portfolio of shares. If you don’t have that much then I would suggest you save hard and stick to passive index trackers until you reach that sort of amount.
Okay, perhaps £20,000 or £30,000 might be enough to start buying shares rather than funds.
But you really do need at least that sort of amount so that the fixed costs of buying and selling shares (mostly broker fees of around £10 per trade) don’t hobble your returns.
Time is also important.
I launched the model portfolio in 2011 when I was 39. I think a £50,000 investment portfolio at 39 is achievable for a lot of people, although perhaps not most (my real world portfolio is larger than the model portfolio through a combination of sensible saving and luck in the housing market).
I think most people (or at least most households) should be able to build a £20,000 or £30,000 investment portfolio by the age of 40.
So if I’m to grow this model portfolio to one million pounds before my 65th birthday, I need to do it in a total time of just 26 years (six of which have already passed).
And unlike a real world portfolio, the model portfolio doesn’t benefit from additional savings. It’s a closed portfolio with no additional cash going in or out (although all dividends are reinvested).
This makes the task of reaching a million pounds that much harder. But that’s okay. I like a challenge.
My wife thinks this million pound goal is crazy, and she could be right.
But in the end it all depends on the portfolio’s doubling time.
Doubling your portfolio over and over again
Turning £50,000 into a million pounds may seem like an insurmountable mountain, but if you look at it from the point of view of doubling your money it becomes a lot less scary.
The first doubling adds £50,000 – My model portfolio will have grown to £100,000, which really doesn’t seem like much compared to the goal of a million pounds (in fact, at its most recent quarterly review the model portfolio almost hit this milestone, so the first doubling is pretty much in the bag).
The second doubling adds £100,000 – This takes the portfolio to £200,000, which is still nowhere near a million.
The third doubling adds £200,000 – Now we’re getting somewhere. The portfolio reaches £400,000 and is almost halfway to a million.
The fourth doubling adds £400,000 – This doubling sees the portfolio jump almost to the finish line, at £800,000.
So going from £50,000 to one million pounds takes just four and a quarter doublings.
The key point to remember from this whole article is this:
- If a portfolio’s growth rate is (approximately) constant then each doubling will take (approximately) the same amount of time.
The fourth doubling will add a massive £400,000 to the model portfolio. But with a consistent growth rate it will take the same amount of time as the first doubling took to add just £50,000.
This is the magic of compound growth.
Focusing on how many doublings you have left is more useful than focusing on your portfolio’s current value versus its target value.
Why? Because when you reach £100,000 it’s easy to think you’re only one tenth of the way to a million. But in terms of doublings, you only have three and a quarter to go.
I think that’s much more motivating than saying “I’ve made it to £100,000, now there’s just £900,000 to go!”
To show you what I mean, here’s a nifty Millionometer of where the model portfolio is today, with its value standing at just over £95,000:
Rather than being one tenth of the way to a million, in terms of doublings the portfolio is already almost one quarter of the way there.
That makes me much more motivated to get the next doubling, and the next, and the next.
The next question is: How long will each of those doublings take?
Doubling time is the key metric and it’s easy to calculate
Thanks to the rule of 72, it’s quite easy to estimate the number of years it would take for an investment to double, given a fixed annual rate of return.
For example, if you put £50,000 into a savings account with a 2% interest rate and reinvest all the income, the investment will double in approximately 36 years, i.e. 72 divided by 2.
At that pace it would take 153 years to go from £50,000 to a million, so don’t count on becoming a millionaire if you expect your portfolio to grow at 2% per year.
A more realistic rate of return for shares is 7% a year. That’s what the UK stock market has returned historically (based on inflation of 2% and real returns of 5%).
With returns of 7% a portfolio will double in just over 10 years (72 divided by 7).
A passive index-tracking portfolio growing at that historically average pace would turn £50,000 into one million pounds in about 44 years.
That’s way outside the 25-year timeframe I’m looking for. If I’m going to get this portfolio to a million before I’m dead, I’ll have to speed things up a bit.
Speeding things up by targeting (and hopefully producing) market-beating returns
To speed things up I’m trying to generate a higher rate of return than the market average of 7%.
Currently, my long-term target rate of return for the model portfolio is at least 10% per year.
At 10% per year a portfolio would double in just over 7 years (72 divided by 10) to double the portfolio and just over 30 years to go from £50,000 to one million pounds.
So here’s the important bit:
- Just going from 7% to 10% per year shaves more than a decade off the time it takes to go from £50,000 to a million.
As they say at Tesco, every little helps.
But 30 years still leaves me reaching the million pound mark at 69 rather than 65, so is it possible to get more than 10% per year? Perhaps.
Personally, I think the most the model portfolio could return is about 15% per year over the long-term. This is, after all, a high yield, low risk “defensive value” portfolio. I don’t want to aim for 20% per year and end up losing the lot.
If the portfolio does grow at 15% per year then the doubling time shrinks to just under five years. At that pace the million pound mark would be reached after just 20 years.
So in summary:
- I think the model portfolio should be able to produce long-term returns of 10% to 15% per year
- At that pace the portfolio will reach one million pounds within 20 to 30 years from its start date in 2011 (i.e. between 2031 to 2041)
- By then I’ll be between 59 and 69, which sounds like a good age to choose between work and retirement
As I said at the outset, this is a long-term goal.
And yes, 20 to 30 years is a long time, but the time is going to pass anyway, so why not try to make a million along the way?
A million sounds nice in theory, but what about reality?
I’m assuming the portfolio can return 10% to 15% over 20 to 30 years. That’s 20 to 30 years of market-beating returns. Is this realistic, or am I just dreaming?
Let’s have look at what’s happened so far:
- First, the model portfolio’s current value is just over £95,000, so in the six years since 2011 it has more or less completed its first doubling
- Second, over the last five years the portfolio has achieved an annualised rate of return of 14.6%
To be fair, this has been achieved in a relatively benign environment in which the FTSE All-Share has produced annualised returns of 11.7% compared to its expected long-run return of 7% per year.
But still, based on the evidence of the last six years, I think a 10% to 15% rate of return is achievable, and therefore so is the million pound target date of 2031 to 2041.
That’s just 14 to 24 years away, so no pressure then!
Long-term goals are important, so what are yours?
Aiming for a million pound portfolio before my 65th birthday gives me something to aim for as the years tick by, rather than just doing my best, but with no real point at which I can say “yes, I’ve done it”.
Hopefully you have a long-term investment goal as well, one that’s appropriate to your own personal circumstances.
And if you don’t have one, then why not think about setting one now?