While the idea of making a million may sound like a pipe dream to some, in reality, the stock market could make it possible for almost anyone to generate a seven-figure portfolio.
Certainly, this achievement will not happen in a short space of time.
By investing in the right companies and sectors over the long run, it is possible for even modest amounts of capital to grow into a sizable portfolio.
With that in mind, here are three areas that I think millennials should focus on when investing their hard-earned cash.
While investing may seem to be an activity that can be put off until later in life, the reality is that the earlier the process starts, the better.
Common complaints among millennials include insufficient savings for investment or the need to build their career first before they start to invest.
What you need to know is that even modest sums of capital today can eventually grow into significant amounts that can have a major impact on an individual’s financial standing later in life.
As such, it may be worth not only saving as much as possible each month but investing it in the stock market too.
A good idea for new investors who may not have large amounts of capital could be a tracker fund such as an exchange-traded fund (ETF).
An ETF provides a low-cost means to diversify — especially with online share transactions being a relatively cheap means of investing.
Since a longer time period magnifies the impact of compounding, investing in a range of great companies at the start of an individual’s career should prove to be a wise move.
Buy and hold
While financial assets such as Bitcoin may provide excitement and be potentially profitable in the short-term, the idea of generating high returns in a short space of time is riskier than you think.
It can also lead to significant losses.
History has shown that buy-and-hold investing has a strong track record of delivering more consistent returns.
Evidence can be seen in Warren Buffett’s career.
He was far from a billionaire or let alone a millionaire when he started investing, but his ability to buy stocks and then hold them – sometimes without ever selling them – means that he has benefitted from the full potential of his holdings.
Buying a stock and holding it for five to 10 years may not seem like an appealing way to generate wealth.
However, as the business grows over the years, it can reward patient shareholders.
As strong companies grow their profit, cash flow and dividends over time, their share price will naturally rise in tandem with their good performance.
By owning the stock over years or even decades, you will enjoy capital appreciation and also a steadily-growing stream of passive income.
The right sectors and companies
As Alibaba (SEHK: 9988) founder Jack Ma famously stated in an interview, his competitive advantage versus peers is due to him thinking 10years ahead.
He does not try and second-guess what will happen in the short run, but rather has a vision of how various industries could evolve over the long run.
An investor may consider how an ageing world population will impact demand for healthcare, property and other goods and services.
With the pandemic altering many human habits and practices, it can also be insightful to study the sectors and companies that will benefit in the long-term.
Cloud computing companies such as Microsoft (NASDAQ: MSFT) and software-as-a-service businesses such as DocuSign (NASDAQ: DOCU) have been key beneficiaries of this online shift.
Or, they may wish to focus on the continued growth of emerging markets, where a growing middle-class segment can afford to purchase premium consumer goods.
Companies such as Mercadolibre (NASDAQ: MELI) are scaling up their platform to cater to the Latin American population, for instance.
Investing in these long-term growth industries and companies can help to catalyse a portfolio’s returns.
By latching on to these winners, you can steadily grow your investment portfolio to a comfortable size when you reach retirement age.
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Disclaimer: Royston Yang does not own any of the companies mentioned.