How likely are you to become a millionaire in 20 years’ time (the power of compound rate of return)?

Have you ever visualize the power of compound rate of return or thought of how long it takes to double your money if the compound rate of return (CRR) were 3%, 6% or 9% per annum? In Figure 1, I had used CRR of 3%, 6% and 9% per annum for calculating the compounded return (CR) over 20 years for a lumped sum of saving of $100,000 (P). As shown in Figure 1,
1) P+CR is 2 times of P after about 8 and 12 years for CRR of 9% and 6% per annum respectively. (Note: Rule of 72 also gives the estimate of 8 (72/9) and 12 (72/6) years respectively).
2) We will get $182K, $331K and $560K at the end of 20 years for CRR of 3%, 6% and 9% per annum respectively. For the CRR of 3% per annum, the blue curve is almost like a straight line over 20 years. On the other hand, for the CRR of 6% and 9% per annum gives exponential curves as presented in red and green curves respectively (obviously, we would like to put our money to grow exponentially).

 
           Figure 1: P+CR vs number of years for a lumped sum investment of $100,000.


Next, if we were to save $1K per month, we will get $328K, $462K and $667K at the end of 20 years for CRR of 3%, 6% and 9% per annum respectively (see Figure 2). As expected, you can see that the net return is less impacted by the CRR as compared to the previous case on the lumped sum investment.
 
             Figure 2: P+CR vs number of years for monthly investment of $1000.

So, are you likely to be a millionaire in 20 years’ time? Probably, you are able to find out the answer now. The next question is how to achieve the required rate of return. Figure 3 is meant for illustrative purposes and is published by Blackrock on the return from different asset classes from 1994-2014. It is noted that investment in Large Cap Growth, Small Cap, Large Cap Core and Large Cap Value stock gave about 9-10.5% average annual return, while fixed income and diversified portfolio gave 6.2-8.7% average annual return. If you want to start your journey to become a millionaire in 20 years’ time or you have embarked on your journey to become a millionaire or you are already a millionaire, do you think you can still continue investing in Large Cap Value stock?
  
                Figure 3: A published figure from Blackrock.

Source: Informa Investment Solutions. Past performance is no guarantee of future results. The information provided is for illustrative purposes and is not meant to represent the performance of any particular investment. Assumes reinvestment of all distributions. It is not possible to directly invest in an index. Diversification does not guarantee a profit or protect against loss.

n Large Cap Core is represented by the S&P 500 Index, an unmanaged index that consists of the common stocks of 500 large capitalization companies, within various industrial sectors, most of which are listed on the New York Stock Exchange. Large Cap Growth is represented by the Russell 1000 Growth Index, which consists of those Russell 1000 Index securities with higher price-to-book ratios and higher forecasted growth rates. Large Cap Value is represented by the Russell 1000 Value Index, which consists of those Russell 1000 Index securities with lower price-to-book ratios and lower forecasted growth rates. n Small Cap is represented by the Russell 2000 Index, which is a market-weighted small capitalization index composed of the smaller 2,000 stocks, ranked by market capitalization, of the Russell 3000 Index. International is represented by the Morgan Stanley Capital International (MSCI) EAFE Index, an unmanaged index that measures the total returns of developed foreign stock markets in Europe, Asia and the Far East. Fixed Income is represented by the Barclays US Aggregate Bond Index, an unmanaged market-weighted index that consists of investment grade corporate bonds (rated BBB or better), mortgages and US Treasury and government agency issues with at least one year to maturity. Cash is represented by the ML US Treasury Bill 3 Month Index, an unmanaged index based on the value of a 3-month Treasury Bill assumed to be purchased at the beginning of the month and rolled into another single issue at the end of the month. US Treasury securities are direct obligations of the US government and are backed by the “full faith and credit” of the US government if held to maturity. Diversified Portfolio is composed of 35% of the Barclays US Aggregate Bond Index, 10% of the MSCI EAFE Index, 10% of the Russell 2000 Index, 22.5% of the Russell 1000 Growth Index and 22.5% of the Russell 1000 Value Index.