How to Become a Millionaire on Just $25,000 a Year
By Dan Ferris
June 16, 2007
There once was a man who became a millionaire... even though he never made more than $25,000 a year in his whole life.
A few years ago, when he was 85, he had about $1.4 million.
I bet there are precious few people who've made $25,000 a year or less and have $1.4 million in the bank, even though it takes far less effort than most people would ever believe.
- Did this fellow hit the lottery? He did not. I bet he's way too smart to gamble.
- Did he trade options? Perish the thought. Too complicated.
- Did he invest in a hedge fund? Again, too complicated – and too damn expensive!
- Does he at least read Extreme Value? I do not know, but I seriously doubt it.
The man who never made more than $25,000 a year started investing in 1974 with $500. I don't know how much he put away each year, but it couldn't have been very much at all, not on such a modest income.
Perhaps you're thinking, "Oh I get it. You're about to tell me he bought shares of Berkshire Hathaway with a few hundred dollars. That's why he's a millionaire now."
No. In fact, the millionaire who never made more than $25,000 a year did something very nearly the opposite of buying Berkshire Hathaway...
He bought the Vanguard "500 Index Fund and Total Stock Market Index Fund, several of [Vanguard's] managed equity funds and taxable and tax-exempt bond funds, and a diversified list of individual stocks."
The list is quoted from John Bogle's new book, The Little Book of Common Sense Investing. Bogle tells the story of the millionaire who never made more than $25,000 a year on pp. 213-214. Perhaps the most remarkable statement in the letter Bogle received from his faithful client was this: "I have only bought – never sold."
This statement did not shock me, since I firmly believe that no one knows when or how to sell stocks (not even Warren Buffett).
I don't do as much writing as my more prolific (and much wealthier!) colleagues. Aside from a little laziness, I just can't get around my strong belief that there's little that actually needs to be written about investing.
But – and this is a big, fat "but" – what needs to be written about investing needs also to be repeated forever. One thing that bears repeating is that it's unlikely the average investor will beat the market over the long term. Most investors shouldn't even attempt to actively manage their own stock portfolio. They should buy a diversified portfolio of stocks, hold it for the long, long, term and never sell.
Whether or not the market is totally efficient isn't the point. The point is that most individuals aren't emotionally wired up for active investing, any more than they're wired up to play Major League baseball.
The man who made $25,000 a year or less in his 50s, 60s, and 70s knew he wasn't a budding Warren Buffett. So he put his money into a big, diversified portfolio that charged very low fees and left it there forever – by far the most prudent investment he could have made. That's your best chance of getting rich in stocks. Buy a bunch and never sell. By never selling, you keep your money at arm's length from the taxman and allow it to compound year after year.
I've preached focus – the idea of owning just a few high quality stocks – for a few years now, but I have to admit that a highly focused approach is not appropriate for most people. In fact, I'm willing to bet that, of my thousands of readers, the few who can handle a focused portfolio are very likely to be investment professionals with decades of experience.
If you don't feel like you're suited to own individual stocks, just buy a diversified, low-cost index fund and hold it for decades. It's useless advice to the financial services industry – an industry that encourages you to buy lots of worthless mutual funds – but it's the best chance most people have of getting rich in stocks. If you do choose to buy individual stocks, here's my take:
Buying a diversified portfolio (10 stocks is plenty) of the greatest businesses that have ever existed and holding it for a long, long time is your best chance (not to mention the easiest way) to get rich by owning stocks.
Don't get scared out of the market. Don't trade. Don't worry about the headlines or the news or the S&P 500 falling 10%. Just buy a diversified portfolio of great businesses and hold on for at least two decades. That's how you make huge long-term averages of 15% or even 20% a year.
That's how you become a stock-market millionaire, even on a modest income.
