A popular daydream for anyone with access to a compound interest calculator is working out how much interest you’d earn on a million pounds. But how do you make a million pounds in the first place?

You could marry a millionaire, but if you’re the sort of person looking to do that then you’re too busy at the gym or on the ski slopes to read Monevator.

You could win the lottery. Good luck! Mathematically it’s illogical to even try, but £2 a week won’t hurt. Or you could buy a few Premium Bonds.

You could start a business, but beware that’s very risky. (On that score, don’t blog to get rich. You’ll starve).

Some people make by developing property. However once you get beyond owning your own home this is really another form of business.

That leaves saving your surplus income and investing it to make your million.

How realistic is it to become a millionaire this way?

Make a million pounds by saving and investing

Saving and investing your way to a million pounds may seem a daunting task.

For most of us, it is. But it is far from impossible.

How you make your million by investing depends on three factors:

• The amount you save every month
• The rate of growth of your investments
• The length of time your money has to grow

Let’s ignore another factor here, which is tax and pensions. If you’re a taxpayer, the Government gives you tax breaks which effectively increase the size of your monthly savings without you having to save any more money. You’ll reach a million quicker, all things equal. But the downside is your money is locked away in a pension. You’ll be taxed on the income when you withdraw it, too.

Everyone’s tax situation is different, so in articles like this it’s best to ignore tax. But you shouldn’t when doing your own sums!

What will you earn on your portfolio?

The rate of growth in your investments (also known as the return) will depend on where you put your money – and how lucky you are!

There are no guarantees and much swearing and death threats discussion about what is likely. But just to give you a ballpark idea of long-term expected returns:

• Cash and government bonds could earn 2-4% a year
• Corporate bonds could early 4-6% a year
• Commercial property might earn 6-8% a year
• Equities (shares) could earn 8-10% a year
• Riskier equities like small caps or emerging markets might hit 10-12% or more

These returns are inclusive of inflation, which will reduce the spending power of your money over time.

The important point is cash is the least-risky asset, but it offers the lowest prospective returns. Each successive asset is riskier but a better bet for the long-term.

Put your money into small cap stocks for example and you’ll have to stomach some daunting volatility along the way. However you might be more likely to get to a million before you get a bus pass.

Can you beat these returns by share trading? If you’re an amazing share picker or Warren Buffett you might make as much as 15-20% a year. But very, very few people can do that for long. If you’re one of them, you’ll probably already know it.

Note that most people generally invest in a range of assets for portfolio diversification purposes. This reduces the volatility, but it can be expected to reduce overall returns, too.

It’s also worth knowing that the longer you hold your assets, the more likely you’ll enjoy their average historical return.

Share prices, for instance, jump around all over the place in the short-term.

But as your holding period increases from months to years to decades, your returns tend towards the average.

How much must you save a month to make a million?

The following table tells you how much you need to save every month to make a million within different time periods, and with different rates of growth.

Cross-reference the growth rate in the top row with the  length of time you can endure it until you’ve got your million pounds.

Where time and growth intersects is the monthly amount you’ll need to save:

	4%	6%	8%	10%	12%	15%
5 years	£15,061	£14,322	£13,621	£12,958	£12,330	£11,449
10 years	£6,795	£6,125	£5,516	£4,964	£4,464	£3,802
20 years	£2,739	£2,195	£1,746	£1,381	£1,087	£754
30 years	£1,455	£1,021	£705	£481	£325	£178

What about inflation? I’ve ignored it here, because this article is about making a million pounds in nominal terms. In reality a million pounds will buy far less in 20 or 30 years. A shortcut is to read the column to the left of your expected returns. So if you expect to make 8% a year, read the column for 6%. This allows a couple of percent for inflation.

Have a play around with different rates, time periods and monthly savings amounts using our calculator.

A million pounds is certainly not what it used to be. However you’ll soon discover it is still very hard for the average person to make a million pounds quickly through investing.

A million pounds is also an arbitrary number. You’re better off working out your own sustainable plan to reach your financial goals – one that you can stick with for the long haul!

Try our millionaire calculator or see the interest on a million pounds.

What caught my eye this week.

Even the most strategically disinterested passive investor – that’s a compliment, incidentally – will know that the biggest US technology firms were what drove global equity returns higher last year.

I featured dozens of links in 2023 to articles charting the rise of the so-called ‘Magnificent Seven’.

Behemoths such as Microsoft, Amazon, Apple, and Alphabet that couldn’t possibly get any more highly-valued. Until they did!

Broaden the lens to the asset allocation level and things were almost as skewed. Not only did a handful of mega-cap equities drive returns – but equities, especially US ones, were really the only game in town.

And let’s not remind ourselves of the nightmare of 2022.

But okay, if we must then you’ll recall it was the year that diversification utterly failed and pretty much every asset went down. Starring, of course, the worst bond bear market in several generations.

Very high inflation and rising rates sent bond yields soaring and bond prices crashing.

This was not unpredictable given the pace of rate rises (which were unpredictable).

But it did make one despair of owning a diversified portfolio, and saw the 60/40 portfolio written off as dead (again).

Last year already proved that particular obituary to be premature (again, again). Especially in the US.

But while an end to the free fall in bond prices didn’t hurt, the truth is the 60/40’s decent showing was in no small part due to those biggest tech companies returning 50-100% or more in a single year.

So diversification worked, but only because it didn’t get in the way of what really worked.

Risky business

This all-conquering short-term dominance of equities is not an inevitable state of affairs, as this graphic from Legal and General’s 2024 outlook explains:

The graph shows that from around late 2001 to 2014, investors were rewarded – on a risk-adjusted basis – for having diversified portfolios, compared to if they’d only held global equities instead.

Since then though, more often than not owning anything but equities has been a drag.

This probably won’t last. Not least because high-quality government bonds now boast nominal yields of 4-5% or more thanks to the big sell-off, as opposed to the 1% or so they touted before it.

But also because sooner or later the global slowdown we’ve been promised for 18 months should finally arrive, even if it’s a mild one – and because central banks are due to start cutting rates regardless with inflation falling.

Given all the argy-bargy unfolding on the geopolitical scene, I’d certainly take a recession as the casus incisus that sends bond yields down and hence lifts bond prices – in preference to the potential casus belli rattling across the news.

Indeed Legal and General’s head of asset allocation says:

…this is, in our view, not an environment in which to bet on the concentration of risk. One might be lucky and avoid a crisis but if not, performance could be terrible.

Instead, we believe it’s a matter of spreading risk over multiple regions and multiple return drivers.

Over a longer horizon, we believe diversification should outperform more concentrated portfolios on a risk-adjusted basis.

The historical average of the difference in Sharpe ratios is in favour of diversification, according to our calculations.

First among equals

As I’ve written before, it’s conceivable we’ve entered a late-capitalism endgame where the half-dozen or so mega-companies that got to scale just as AI arrives have the data pools and moolah to win forever.

In which case prepare for either a terrifying dystopia or Ian M. Bank’s culture, to suit your taste.

It seems safer to bet though that the stock market is having one of its moments. That, magnificent though these market darlings indisputably are – perhaps the best businesses we’ve ever seen – they won’t prevail perpetually any more than Vodafone, Standard Oil, or the Dutch East India Company did before them.

In which case it’s probably best to keep a sense of balance. Not least in your portfolio.

More good reads from this week on the theme:

• What to expect when you’re expecting – Fortunes & Frictions
• Why naysayers were wrong about the 60/40 portfolio – Morningstar
• Should your portfolio be 100% in US stocks? – Of Dollars and Data

Have a great weekend!

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