According to the World Wealth Report, in 2019 there were around 19.61 million people worldwide with investable assets of at least one million US dollars. If you compare this to the figures from 2009, there were just 10.04 million millionaires back then.
The amount of millionaires is constantly increasing, and if you can read these lines here, then the probability is high that you can become a millionaire as well by following a very simple path, which almost all millionaires have taken. How this path looks like, and how you can easily walk it down yourself, that you will learn in this article.
The Path to 1 Million: A Simple Calculation
Becoming a millionaire is not as far-fetched or unattainable as it may sound — regardless of how much money you have in your bank account right now.
The reason for this is very simple mathematics and the incredible power of compound interest.
Here’s a simple example: If you start with only $10,000 initial capital, invest an additional $300 monthly and achieve an average annual return of 15% on this money, you will have a whopping $1,095,244.39 in your bank account after 25 years.
To illustrate the power of compound interest even more: Guess how much money you’ll have in your account just 5 years later if all the conditions remain the same? An astonishing $2,227,200.25. That’s more than an extra million on top!
So you see, with enough time, and a good annual return, absolutely anyone with access to the modern financial system can make it into the millionaires club.
But how do you best invest to consistently achieve such a return?
The key: a risk-minimized, well-diversified portfolio
The best and easiest way to maintain a consistently good average annual return over many years is to have a well-diversified portfolio. Diversified means you don’t put all your eggs in one basket, but invest in different asset classes that have little to no correlation with each other. Not to try to maximize returns in this way, but to minimize risk.
For example, if you had held 100% of your funds just in Bitcoin over the last 10 years, it would have been one of the best investments ever: Bitcoin has yielded 20037142% over that period (which is a return of 230.6% per year).
At the same time, however, your risk would have been extremely high, as Bitcoin was still a completely new asset at the time and far less established than it is today… volatility would also have been very high — which it still is today. Price fluctuations in the double-digit percentage range are the rule rather than the exception with Bitcoin. So in a worst-case scenario, you could have lost everything, since no one could have predicted whether Bitcoin would become firmly established like it is nowadays or just come and go.
So instead of only trying to maximize returns, you should also pay attention to risk involved and the potential loss of your money: After all, should you lose money, the compound interest calculation obviously won’t work out that way, and in the worst case it will set you back years. And we have seen in the above example how much of a difference a few years can make.
If, on the other hand, you take the safe route and calculate with a normal return of 10–20% per year, then you will reach your goal sooner or later, depending on the amount invested, as we have seen above.
Nevertheless, in a really well-diversified portfolio you can and should also include strongly performing but more volatile assets like Bitcoin — but with a correspondingly smaller share. This way you still participate in any price gains, which can be quite enormous with Bitcoin, but minimize your downside risk in case of major crashes.
But how and in what should you invest to achieve exactly all that?
The 7 Asset Classes
Depending on the classification, there are 7 different asset classes in which you can invest your hard-earned money:
- Securities (stocks, bonds)
- Precious metals (gold, silver, etc.)
- Real estate
- Currencies
- Commodities
- Alternative Investments (collectibles, spirits, etc.)
- Digital Payment Tokens (Bitcoin, Ethereum, etc.)
A good investor is not necessarily invested in all of them, but definitely in several of these asset classes. On the one hand, this minimizes the risk by buying assets that are hardly correlated to each other, and on the other hand, it also increases the return in times when certain asset classes do not perform so well.
Within the asset classes, there are of course again different assets with different return and risk potential. For example, there are:
- for securities, individual stocks or stock ETFs (ETFs are baskets with several individual stocks together)
- for real estate, those in prime locations and those in socially and politically unstable locations
- for currencies, it largely depends on the different fiscal policies of the countries and their economic strength
- for digital payment tokens (cryptocurrencies), there are very established cryptocurrencies like Bitcoin, proven over more than a decade, and on the other hand, completely new and unknown cryptocurrencies with a much smaller adoption rate (network effect)
- etc.
So you can make it very difficult for yourself, but you don’t have to! Because to achieve returns of 10%, 15%, even 20% and more, as described in the beginning, you don’t need the speculative, risky kind of investments at all:
The picture above is the performance of the S&P500. With the 500 largest listed companies in the USA, the S&P500 is one of the world’s most important index funds and has achieved an average annualized return of 13.9% over the last 10 years alone — per year, that is! And that’s with relatively manageable risk, considering the companies it includes: Apple, Microsoft, Amazon, Google, Visa, Disney and many more world-renowned companies are bundled into it.
Of course, there have also been ups and downs in the S&P500 over the past 10 years, with the worst year-end closing at -4.4% — so albeit relatively slightly — in the red. The best year-end close, on the other hand, was +28.88%, and all 10 years combined add up to the above average annual return of 13.9%. Moreover, with the S&P500, one is betting on only one — albeit economically very strong — country. Therefore, again, it is not recommended to lump everything together! Nevertheless, it shows well that despite relatively low risk, sufficiently high returns are still possible.
And this risk can be further minimized by good diversification into several, different investments — but without reducing the possible return. Another interesting diversification candidate among securities would be, for example, the Nasdaq-100 Index, i.e. the 100 largest technology companies in the USA. Long-term government bonds as a cash equivalent should also be considered.
In a well-diversified portfolio, it also makes sense to hold not only volatile assets, but also cash and cash-equivalent positions, in order to be able to buy cheaply in the event of a market setback, such as the pandemic shock in March 2020, and more generally in order to have a safety cushion for unexpected events.
Among precious metals, gold in particular has proven itself as an asset class for millennia, but with rather low return potential. What distinguishes gold is the stability factor: most currencies, even those of rich countries, sooner or later go down the drain and lose their value. In its millennial history, gold has never collapsed and never had to be substituted, which is why it should certainly be considered in any well-diversified investment portfolio.
Last but not least, digital payment tokens such as Bitcoin have also established themselves over the last 10 years and have been part of any well-diversified portfolio among connoisseurs at least since institutional players such as Tesla, MicroStrategy or ARK Invest have included both Bitcoin and now increasingly even the second largest cryptocurrency, Ethereum, in their portfolios.
The returns in that asset class are undisputedly some of the best you can get on the financial market — but you should not underestimate the increased (default) risk. One thing is clear, however: with returns averaging 230.6% per year for Bitcoin and even more (with higher volatility as well) for Ethereum, the digital payment token asset class should be part of any good portfolio and simply cannot be ignored, even if it continues to stand out for its high volatility.
If you haven’t yet understood the value behind cryptocurrencies like Bitcoin or Ethereum, I highly recommend this article.
Now it’s your turn
In this article, you have now been shown the way how anyone can make it from a very average income and wealth into the circle of millionaires.
Now you just have to put what you have learned into action and act accordingly! Building your own portfolio is a big and important thing and should not be put on the back burner. As so often in life, the first step is the hardest and also takes the most courage. Nevertheless, you should give yourself a push and start thinking about how you should plan your financial future today. A first, small step in this direction could be investing even just a small amount into the most lucrative asset class of the last 10 years — Bitcoin.
Cake DeFi makes investing in Bitcoin a piece of cake by allowing you to easily buy Bitcoin and other cryptocurrencies via wire transfer or credit card at very competitive, transparent rates. In addition to that, Cake DeFi allows you to receive passive income on your cryptocurrencies, greatly accelerating the compound interest effect!
Originally published at https://blog.cakedefi.com on September 29, 2021.
