How to Make a Million Dollars in Ten Years, Part 4: Investing

Here's part 4 in our quest to grow our net worth by a million dollars in ten years as guided by Smart Money. Today, we're focusing on investing, which Smart Money says will net us $478,000 in net worth over ten years. Their key thoughts:

Saving your money is only half the battle; it's just as important to use those savings to construct an investment portfolio that minimizes your fees and maximizes your returns. That may sound like a complicated proposition, but it's largely a matter of avoiding the most common mistakes.

Rule No. 1: Buy low and sell high. Easier said than done, you say? Not if you are disciplined. Make regular investments using a predefined asset allocation (more on that below), and resist the temptation to sell when things look grim. Don't chase the latest fad, no matter how stellar the recent returns.

An effective approach to investing your savings is to use a strategy called "core and explore." The "core" portion of your portfolio, the largest chunk, should be invested in low-cost funds that track the market indexes, such as the S&P 500 or the Dow Jones Wilshire 5000.

Put the "explore" portion of your nest egg in a discount brokerage account, where you'll have the wide universe of stocks and funds at your disposal. It's a small share of your overall portfolio — maybe 10% — that you hope will beat the market.

In choosing a fund, consider long-term performance relative to other funds in the same category. Don't get seduced by last year's hot offering. Avoid funds with expense ratios higher than 1.2%; and keep in mind that plenty of good funds charge less than half of that. Also look out for sales charges, known as loads.

I agree with this advice from Smart Money. I'm a big fan of index funds and closely watch the expenses associated with my investments. They can make a HUGE difference in a portfolio's overall return, so when comparing similar funds, I always go with the lowest cost one (assuming I expect their returns to be about the same).

I've posted regularly on investing and here are some of my recent posts on the subject:

• Why I Like Index Funds

• Three Strategies for Higher Investment Returns

• The Richest Man in Babylon: Three Key Lessons

In summary, after four days we're at $1,147,000 in our quest for $1 million in added net worth in ten years. We've made it in four easy steps!!! This is just what I recommended when I wrote Free Money Finance Guide to Getting Rich.

For reference, here are the links to the other parts of this series:

• Part 1: Staying/Becoming Healthy Helps You Spend Less and Earn More

• Part 2: Saving Money

• Part 3: Savings

Click here to read part 5 of this series.

Comments

[Steve]

I think I am missing something here. Is this advice simply to take the money you have saved and put it to work for you? If not, where is this money coming from?

[FMF]

Steve -- Read the other parts in this series, parts 2 and 3 in particular.

[Wes]

Great article. I plan to read carefully and add the plan to my current strategy for achieving one million dollar net worth before 30. I am 25 now with a net worth of 128k.

www.wesleydjones.com

[7million7years]

Why aim so low? Why not $7million in, say, 7 years ;)