The decadelong bull market in stocks has helped increase the number of millionaire households in the U.S. to nearly 7.7 million, or about 6.2 percent of total U.S. households.
That means they hold $1 million or more in investable assets, excluding the value of real estate, employer-sponsored retirement plans and business partnerships.
No doubt some of those millionaires hit the jackpot in a hot stock or two.
But too many investors over the years have learned that you can easily go bust investing in what you think is the “next big thing.”
A more reliable way to amass an investing fortune is to follow a few tried-and-true rules for building a healthy portfolio. Among them:
Start early: Time and compounding interest are an investor’s best friends. Assuming an 8 percent annualized return on his or her portfolio, a 20-year-old could amass $1 million by age 67 by investing a little over $2,000 a year.
A 40-year-old earning the same return could invest $10,000 a year and still wouldn’t crack a million by retirement age.
Cut costs: You can’t control how your investments will perform, but you can control what you pay for them.
Over the course of decades, paying a fraction of a percentage point more in fees can chisel thousands from the value you end up with. Assess your portfolio and jettison expensive mutual funds in favor of cheaper options.
Vanguard Total Stock Market ETF (symbol VTI), a member of the Kiplinger ETF 20, the list of our favorite exchange-traded funds, tracks the performance of the entire U.S. stock market and charges just 0.04 percent of assets.
Diversify: Don’t put all your (nest) eggs in one basket. Spreading your assets among different types of investments increases your portfolio’s chances of withstanding sharp drops in one corner of the market or another.
Owning a mix of stocks, bonds and cash may cause your portfolio to lag when stocks are going gangbusters, but you’ll hold up better when stocks slide.
When Standard & Poor’s 500-stock index plummeted 37 percent in 2008, the average balanced mutual fund with 50 percent to 70 percent of assets in stocks and the rest in bonds and cash surrendered only 27.5 percent. A good choice is Vanguard Wellington (VWELX), one of Kiplinger’s favorite actively managed funds.
Focus on dividends: Those quarterly payouts count. From 1930 through the end of 2017, reinvested dividends contributed 42 percent, on average, to the total return of the S&P 500.
To boost your exposure to dividend-paying stocks, consider Kiplinger ETF 20 member Schwab U.S. Dividend Equity (SCHD), which yields 3.1 percent.