It is difficult for the average person who has little money left over after making necessary expenditures with his or her paycheck to get started in investing. However, it is possible to start with just $500 or less and grow that small, initial investment to over a million dollars well before retirement.
One of the keys to a growing investment account is the concept of compounding returns. Compounding amplifies total returns to a much greater extent than novice investors usually understand. In simple terms, Compounding returns means that an equal percentage return produces a greater absolute dollar amount profit each year as compared to the previous year. A 10% return increases a $500 investment by $50 after one year, but five years later, thanks to compounding, that same 10% return increases the investment by $118, more than twice as much.
However, even averaging a 10% annual return, that $500 investment only grows to $3,363 in 20 years. If an investor manages a 30% return like top stock investors such as Warren Buffett, things improve markedly, producing a $95,000 return in 20 years, but that is still well shy of a million dollars.
One thing that makes a huge difference is regular monthly contributions. If an investor contributes $50 a month to his initial $500 investment, a 10% average annual return grows the account to $41,165 in 20 years. A 30% average return with $50 monthly contributions grows to over $500,000 in 20 years. With $100 monthly contributions, the total comes to approximately $1.1 million. The path to a million dollars, starting out with only $500, requires generating higher average annual returns and continuing to make regular investment contributions.
Invest in Learning How to Invest
Warren Buffett still touts reading Benjamin Graham's book "The Intelligent Investor" as one of his best investments, since it taught him many of the investment principles that led to his outstanding success. A small investment in learning how to invest wisely can eventually pay off a huge return. Noted hedge fund manager Stanley Druckenmiller strongly recommends finding a mentor. This is especially helpful in learning the world of investing, and many hugely successful investors found their way with the help of a mentor. Billionaire Paul Tudor Jones, founder of Tudor Investment Corporation, credits much of his success to being mentored by the famous cotton trader Eli Tullis.
Start a Business
Owning a business can produce extremely high returns on investment. The internet has made it possible for many people to generate a small fortune within the space of a few years, starting out with just a small investment in a website and some advertising. Among the easiest ways to start a business online is to set up a blog and provide helpful information on a subject in which the blogger has special expertise, or just a special interest. That is the story behind the success of Angie's List Inc. (NASDAQ: ANGI), the website that provides reviews of consumer service providers. As of 2016, it was a publicly traded company, and as of 2015, it generated nearly $100,000 in net income for its owners, Angie Hicks and William Oesterle. There are plenty of free or relatively inexpensive ways to set up an online blog, such as WordPress.com or Blogger.com. Blogs that attract a lot of followers also earn a lot of paid advertising and can charge subscription fees.
Taking a Risk
Billionaire trader George Soros recommends investing heavily in something that looks like an exceptional opportunity. Nearly all hugely successful investors have acquired part of their fortune by forgetting about diversification for the moment and concentrating a large portion of their investment capital into investments they are convinced will pay off. Some may call it a gamble, but seasoned investors call it a calculated risk.
