October 5, 2015
My '20% Solution' For Increasing Your Chances Of Becoming A Millionaire
By Andy Obermuller
Do you want to become a millionaire?
That's obviously a rhetorical question... the majority of us would love it. But what's your plan for achieving that goal?
If your plan is to make that sort of wealth in the stock market, what's your strategy? Blue-chip stocks, index funds, or are you an income investor who wants to watch their dividend "paychecks" (as my colleague Amy Calistri would say) roll in by the truckload?
All of those strategies are great. There's nothing wrong with them, and they'll probably make you money in the long run.
But I doubt they'll make you a millionaire... at least in time for you to enjoy it.
They're not going to give you those "knocked out of the park" returns that you've heard about since you first learned of the stock market.
No, I'm convinced that if your goal is to reach a seven-figure bank account, you need to follow something I like to call the "20% solution."
The idea behind it is simple. If your goal is to become a millionaire in the market, then you need to dedicate a portion of your portfolio to swing for the fences.
Let me explain...
My daughter is in private school. She will eventually go to college and will need cars, trips and -- someday -- perhaps a wedding.
For her and the rest of my family, I've allocated 80% of my portfolio to safe and reliable assets. The kind that I know will allow me to meet my comfort level, and feel confident knowing I can adequately provide for my family.
But the other 20%? That's different.
This portion is dedicated to the "game-changers." These are the types of stocks that have the potential to move the needle on not only the balance of my account, but on the life I live.
You see, most investors are stuck in the slow lane, passively accepting the market's returns and failing to use equities as the supercharging force they can be.
While it's important to have the bulk (80%) of your portfolio tied to dependable assets, I think a portion -- the other 20% -- needs to go toward investments with the potential to knock the cover off the ball. (For more risk-adverse investors I recommend a 10% solution, but in the end it is up to you.)
Here's how the 20% solution works...
I'll start this example with a modest amount to show you how it works. Assume you start with a $25,000 portfolio that tracks the broader market. The average annual return from 2001 through 2010 for the S&P 500 was a measly 3.0%. That means $25,000 turns into $33,597.91 over 10 years.
But things can change dramatically when you add in the potential for just a few big winners.
Let's say you invest 80% of your $25,000 portfolio, or $20,000, in the broader market to achieve that 3% return. Then you allocate the remaining 20%, or $5,000, to a collection of "game-changing" picks -- stocks with the potential to snag major gains.
If that part of the portfolio averages 30% a year, the initial $5,000 grows into $68,929.25 after 10 years.
Add in the $20,000 and its market return, which has grown to $26,878.33, and you've got a pretty nice nest egg of $95,807.58 -- roughly triple the other portfolio, all thanks to where you put just 20% of your money. (Note: You'll notice that this return isn't $1 million, but the results are fully scalable. You can simply start with more capital to reach your goal.)
I've made the comparison in the chart above. Would you rather have Column A, or would you rather end up with Column B, which uses the 20% solution?
I think the answer is obvious.
Now you may be asking, if the 20% solution seems to work so well, why not dedicate 50% or 100% of your portfolio to it?
Simple answer: It's always important to be diversified, and putting all of one's eggs into a single basket is never a good idea, no matter how spectacular the potential for returns.
I can sleep at night knowing that most of my money -- the majority of my equity portfolio -- is invested so as to expose it only to general broad-market risk. Only a small percentage is allocated to game-changing plays with return potential that could move the needle on the overall portfolio.
The fact is, if you pick a few winners over time with a small subset of your portfolio, it can make an enormous difference. Twenty percent can do the trick nicely. It's enough to make a difference, but not enough to keep you up at night.
Don't get me wrong though, I'm not guaranteeing my system will make you a millionaire. There are no guarantees when it comes to investing.
But what I'm saying is this: The results of a portfolio with room for big winners can be dramatically different from those that stick to cash, fixed-income assets or even the returns available in the broad market.
And if your goal is to eventually become a millionaire from the market, I can't think of any better route.
All this begs the question -- how can investors find those picks with the potential to move the needle? The answer can be found in a report I just released on a global trend started by tech giant Apple. And simply put, it has the power to turn a handful of stocks into total game-changers. A few of these stocks have already returned triple-digit gains -- but they still have plenty of room to run. To get access to the names and ticker symbols of these stocks, follow this link.
Chief Investment Strategist