Retiring with a seven-digit bank balance would be highly comforting. It would help you maintain your standard of living without being worried about the finances. Notably, to achieve this feat, you don’t have to start big. A small amount regularly invested in quality stocks would do the job.
Millionaire by retirement
Consider a 25-year-old investor. She sets aside $500 a month and invests in a TSX stock that grows 8% per year. By the time of her retirement, she will have $1.03 million in her retirement reserve.
That’s why they say your time in the market is more important than timing the market. A simple calculation shows that it is enough to invest $500 per month to become a millionaire by retirement if you start early.
And there are plenty of stocks that offer such decent return prospects. Consider Fortis (TSX:FTS)(NYSE:FTS). It is one of the most stable stocks on the TSX. It has returned 13% compounded annually since 1995, notably beating the TSX Composite Index.
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Fortis is one of the biggest utility companies in Canada. It generates a large portion of its earnings from regulated operations, which facilitates earnings and dividend stability. That’s why Fortis is a classic defensive stock that stands tall in almost all kinds of markets.
Note that stocks like Fortis offer decent dividend payouts that play a big role in driving shareholder returns. They provide long-term stability to the portfolios that growth stocks might fall short of.
|Age||Monthly investment @ 8% return||Monthly investment @ 10% return||Monthly investment @ 12% return|
Let’s say you started investing late in your employment. If you are 45, then you have comparatively lesser time for wealth accumulation. So, you will need to set aside a higher amount and invest approximately $3,069 per month to achieve a million-dollar figure. The table above shows how much you need to invest per month if you want to retire with $1 million by the age of 60.
That’s why starting early is essential. It will give more time for compounding and will make it relatively trouble-free to hit the goal.
Many avoid investing in stocks mainly because of the volatility risks. However, investors should try to minimize that risk — not avoid it altogether — by investing for the long term.
If you are an aggressive investor and want to build wealth in a relatively shorter time span, you can consider growth stocks. Growth stocks exhibit higher profitability and, in turn, higher potential for growth. Canadian tech giant Constellation Software (TSX:CSU) is a great example.
With its above-average earnings growth, CSU stock delivered more than 40% of returns compounded annually in the last decade. If you’ve invested $1,000 per month in CSU stock since 2011, you would be a millionaire today.
Constellation Software has a unique business model where it runs a group of vertical market software companies. A $39 billion tech titan has created enormous value for shareholders, driven by its rewarding acquisitions and consistent profitability.
In a nutshell, your portfolio should be a combination of stocks like Fortis as well as Constellation. Growth stocks will outperform in bullish markets, while defensive ones will provide stability in market downturns.
Regularly investing a small amount evens out the timing risk and dominates the volatility.
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This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Vineet Kulkarni has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends Constellation Software. The Motley Fool recommends FORTIS INC.