By Andy Obermueller (Street Authority | Original Link)
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 truck load?
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 “10% 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…
I’m a father of a daughter who’s in private school, will go to college and who will need cars, trips and someday, a wedding.
For her and the rest of my family, I’ve allocated 90% 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 10%? 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 (90%) of your portfolio tied to dependable assets, I think a portion — the other 10% — needs to go toward investments with the potential to knock the cover off the ball.
Here’s How the 10% 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 2002 through 2011 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 90% of your $25,000 portfolio, or $22,500, in the broader market to achieve that 3% return. Then you allocate the remaining 10%, or $2,500, 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 $2,500 grows into $34,464.62 after 10 years.
Add in the $22,500 and its market return, which has grown to $30,238.12, and you’ve got a pretty nice nest egg of $64,702.74 — nearly double the other portfolio, all thanks to where you put just 10% 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 to the right. Would you rather have Column A, or would you rather end up with Column B, which uses the 10% solution?
I think the answer is obvious.
Now you may be asking, if the 10% 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. Ten 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 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.
[Note: Interested in finding the next Game-Changing stock? My research team and I have spent the past several months looking for the "next big thing"... What we've found will surprise you. Turns out there's an entire underground stock market dedicated entirely to serving some of fastest growing companies in the world. In the past, this market has been limited to "high-net worth" individuals like Mitt Romney and Warren Buffett... But thanks to our research, we've found a way you can get in on the action and invest along-side these Wall Street insiders.]