How to Become a Billionaire

How much do you have to save in order to build a portfolio worth one billion dollars? For the average investor the answer is simple: A lot of money.

First let’s take a look at some of the assumptions. For returns, we are going to assume an average compound interest rate of 8%, and a time frame of fifty years (investing from age twenty to age seventy). We will get into the details of different rate assumptions and sequence of returns, but first we just want a baseline. Saving for fifty years with interest compounding at a rate of 8%, you have to commit a mere $1.7 million per year to breach the one-billion-dollar line.

Pretty simple, right? Let’s tweak the rate assumptions a little. Let’s say you are able to reliably make 12%, year in and year out, on your money. That puts you at a much more reasonable $375,000 per year that you must commit to your investments. On the flipside, maybe you only earn 4% per year. Well, you’re just going to have to increase that annual investment to $6.5 million.

Most of us don’t have that kind of cash to invest, but there’s a lesson here if we dig in a little deeper. These return assumptions are absurd, because whether or not your return averages 8% (or 9% or 7.63%, etc.) it won’t be the same every year. Some years you are going to see big returns, and some years your investments will decrease in value, maybe by a lot. The timing of when bull and bear markets occur makes a difference, as well as the timing of the appreciation of an individual investment asset. For example, if the market was down for an extended period of time early on in your investing career, and then the final years the market experiences an enormous rally, even though your average rate of return might still be 8% your actual return will be much higher than someone who experiences the exact opposite sequence.

Maybe we aren’t going to become billionaires, and hopefully we don’t have to in order to be satisfied with our investment results, but the same principles still apply regardless of the amount, and it’s important for us to realize that average rate of return is not the only return figure that counts. The reality is that we can’t know what our sequence of returns will be over our investing lifetime, so we use average returns as an estimate to determine a reasonable amount to invest and meet our goals, whether that final figure is $1 billion, $1 million, or $1,000.