Does it take luck to become a millionaire?

[robby]

I'm wondering how much luck does it take to be a millionaire? I know that saving money and having it is essential, bit it seems that most of the people I hear about become millionaires because they picked a lucky stock or were with the right company at the right time. Or they hit the housing market at the right time. Or something else like that. So how much does "luck" play on becomming a millionaire or can anyone do it?

[JLP]

Anybody can become a millionaire provided they start early enough and stick with an investing program. The media loves those get rich quick stories. That's why you hear about them. The solid path to riches is slow and steady.

JLP

[Tree0164]

Starting young as well. Compounded interest!

There are a lot of calculators online that will show you how much you need to save in order to be a millionaire.

[amomof4]

Read "The Millionaire Next Door". It's a matter of saving your money & not keeping up with the Jones. U can buy a $25,000 new car, or a $5,000 used car & save $20,000.

I once read a story of a black, poor women. She had to quit school to take care of her parents & put her siblings through school. She lived in a shack that didn't even have running water. Her only job was ironing other people's close. She never owned a car. She put all her money in her checking account. Eventually, her banker recommended it going into a CD, or something like that. At the end of the month, all un-needed money was transferred to her savings. She never kept up with how much money she had. When she died, she willed her money to the black college fund so others would have the opportunity to get an education that she was never able to get. I don't remember how much she willed, but it was in the $100,000's. If she could accumulate that much money by ironing, how much more can we accumulate? I wish I had kept a copy of this store.

[robby]

I know all the things about how great compound interest is, but they all use models with 8% or 10% compounded. Now you can only get 3% or less from a bank.

And I know that historically the stock market has produced better results, but it isn't an even spread. So if the stock market happens to be bad your first few years, the results will be totally different than an average that everyone writes about.

That is why I was wondering how much luck is involved. You have to pick stocks that increase and they have to do that when you first get them. That takes either a lot of knowledge or luck I would think.

A lot of small businesses create millionaires, but most small businesses go bankrupt, so there has to be some luck there in having the business succeed. And there are good business with solid plans that fail due to bad luck.

So how much is luck?

[JLP]

I think you are making this a lot more difficult than it really is. First off, if you are young, you will most likely be dollar-cost averaging. This means that you put the market's volatility to work for you. In other words, when stock prices are low, you buy more shares, when stock prices are high, you buy less shares. In the long-run you should do just fine.

Also, you say: "So if the stock market happens to be bad your first few years..." Actually, if the market has to be down, you want the down years when you first start investing, when you don't have as much capital at risk. A 20% loss on a $1,000 investment is much better than a 20% loss on a $1,000,000.

I urge you to get a copy of Jeremy Siegel's Stocks for the Long Run and read it. You will do yourself a big favor if you do.

JLP

[robby]

Originally Posted by JLP

Also, you say: "So if the stock market happens to be bad your first few years..." Actually, if the market has to be down, you want the down years when you first start investing, when you don't have as much capital at risk. A 20% loss on a $1,000 investment is much better than a 20% loss on a $1,000,000.

Yes, this makes sense on the surface, but if you use the tools and it says you will make your million in 30 years at 8%, but the first 5 years you lose 2% each year, when that 30 years comes up, you won't even be close to the million dollars. From what I can tell, compound interest works better the longer you have it. So if your first years start out slow, it throws the timeline completely out the window since it is the first few years that are most important.

In your scenerio a 20% loss on $1 million is big ($200,000), but if you don't earn the 8% in the first five years, you wouldn't have even $500,000 (or a $500,000 loss) because the compounding never took effect.

So under these circumstances, I would rather have a 20% loss at the end than it at the beginning since I would end up with more.

[JLP]

You would have to invest $8,827 per year for 30 years at 8% ROR to get to $1,000,000.

I just set up a spreadsheet using the $8,827 as the annual contribution. First I ran it saying that you lose 2% per year for the first 5 years and then gain 8% per year thereafter. At the end of 29 years, your account balance would be $824,503. Yes, you wouldn't reach your million dollar goal.

But, I ran the numbers using the same $8,827 annual contribution amount, assuming you get an 8% ROR for the first 20 years and a 2% loss per year for the last 5 years. At the end of 29 years, your account balance would be $566,287.

Pretty interesting stuff.

JLP

[Momtwo]

You can absolutely become a millionaire if you follow these 2 Golden Rules:

- Start saving when you are young. Pay yourself a certain percentage a month before you pay bills and spend on consumables. Through investing, compounding and having time on your side, you can do it!

- You and your family are the most important people in your life. You do not need to keep up with the Jones! Most of the Jones will be broke when they retire. I know lots of them who are living at poverty level now in retirement!
Enjoy your life, have fun but also save for your future! Even if you can only save a little bit, it will add up to a lot.

I would say that JLP's example calculation shows just how important luck can be. You can see that a relatively short run of five years of bad luck would halve your potential retirement fund. Too bad if that dip happens right when you need it. But this assumes that all your money is in shares.

What will $566k buy you in the year 2035? Probably not twenty years plus worth of comfortable retirement. And how many people get a thirty-year run without a major financial shock to make them dip into their savings?

I'm not saying it's wrong to invest - my saved money is all invested, but I'm just saying you have to be realistic about the probable benefits.

The more effort you put into planning your investments, the more likely you are to avoid costly mistakes. You can never eliminate all bad luck, but you can anticipate some events based on their probability. The more cautious you are, the less likely that you'll be wiped out by bad luck, but ... the lower the risk, the lower the potential return.

So really, it's up to you how much (potential) luck is going to be involved.


John.

[JLP]

Originally Posted by John C

I would say that JLP's example calculation shows just how important luck can be. You can see that a relatively short run of five years of bad luck would halve your potential retirement fund. Too bad if that dip happens right when you need it. But this assumes that all your money is in shares.

Well, I used an 8% average ROR because that's what the previous poster used. However, the long-term ROR for something like the S&P 500 Index is well over 10%. Luck has nothing to do with it.

JLP

[terry1156]

What has the S&P 500 index fund been over the last 5 years? Both average and yearly?

[JLP]

Originally Posted by terry1156

What has the S&P 500 index fund been over the last 5 years? Both average and yearly?

S&P 500 Index Returns:

2000 -10.14%
2001 -13.04%
2002 -23.37%
2003 26.38%
2004 8.99%
Average -2.23%
GeoAverage -3.77%

The Dow Jones Total Market Index did considerably better:

2000 -9.23%
2001 -11.95%
2002 -22.08%
2003 28.44%
2004 10.16%
Average -.93%
GeoAverage -2.50%

This just emphasizes the importance of DIVERSIFICATION! If you put all your eggs in one basket, you're asking for trouble.

JLP

[akaivyleaf]

luck? I don't believe in luck. I don't think things happen without an underlying reason, maybe we can't comprehend the reason but there is still a reason.

For this, I don't think becoming a millionaire is a lucky thing. Unless you're referring to inherited money- the lucky sperm club and even then, somebody worked for it and planned for it. And another thing, a Million isn't what it used to be. I think it can be easily obtained, with dedication and persistence to your own personal financial goals, but a Million dollars in 2005 won't keep you living the same standard that you're used to in 2055. So there has to be some system and logic in growing your money at the same rate or greater than the rate of inflation which many feel is stocks or real estate. Plus you still have to earn money to invest. Everything is cyclical. What goes up, must come down... so hitting that one "lucky" stock isn't going to always keep you up. Unless you take your money and run, and that is counter to the entire nature of the stock market. Diversification is another key word. Don't place your trust in finding the one stock, but in several, but you know this.

In sum... there is no quick fix to becoming a millionaire, there is determination, wit and whimsy. You have to put your time in.

[Momtwo]

Right On Sharon!

[robby]

I think the numbers show that some luck is involved. If you by chance happened to start your 30 years of investing on 2003 rather than 2000, your money would be worth much more. I've been reading and it seems that the first 5 years and the last 5 years are crucially important.

You also mentioned the need to diversify. Isn't what you happen to diversify into luck? If you happen to hit the right spot, then you win and if you don't, you can lose big. I think it's very misleading when people throw out the 10% average because if your % gains are negative for the first five years and the last five years, you aren't going to be anywhere near $1 million.

[midnight]

I don't know anything about investing, but I would like to be a millionaire. This may be a stupid question so if it is, I'm sorry. If the S&P 500 fund averages more than 10% a year, why would I want to diversify? Will diversification earn me more than 10% a year?

[JLP]

Originally Posted by robby

I think the numbers show that some luck is involved. If you by chance happened to start your 30 years of investing on 2003 rather than 2000, your money would be worth much more. I've been reading and it seems that the first 5 years and the last 5 years are crucially important.

You also mentioned the need to diversify. Isn't what you happen to diversify into luck? If you happen to hit the right spot, then you win and if you don't, you can lose big. I think it's very misleading when people throw out the 10% average because if your % gains are negative for the first five years and the last five years, you aren't going to be anywhere near $1 million.

Well, the likelihood of having 5 straight bad years is pretty slim. I'm not saying it can't happen, but I don't think it is very likely.

No, diversification is not luck. Rather, it is using wisdom. Wisdom tells us that it isn't wise to put all your eggs in one basket.

It all boils down to the fact that you shouldn't worry about things you can't control.

JLP

[JLP]

Originally Posted by midnight

I don't know anything about investing, but I would like to be a millionaire. This may be a stupid question so if it is, I'm sorry. If the S&P 500 fund averages more than 10% a year, why would I want to diversify? Will diversification earn me more than 10% a year?

A lot of people just invest in the S&P 500. I personally like the Dow Jones Total Market Index better because it includes the total market (including small and midcap stocks).

The point of diversification is that it "smooths" out your returns, which gives you less chance of losing a lot of money on one idea.

JLP

[akaivyleaf]

The S& P is diverse. It is comprised of 500 stocks from different sectors. So investing in the S$P500 is picking 500 distinct stocks. What are sectors? Technology, pharmeceuticals, oil, etc.