Will I reach my portfolio goals with current investment strategy?

 I have been pondering if my current investment method will achieve the 1 million euro portfolio goal and 55 thousand euro annual dividend. It is a big portfolio and it does depend on inflation and many other factors between heaven and earth. In order to better understand the requirements I made a few scenarios to display my thoughts and options. 

Have divided into two main options based on savings needed per month. Note that there are many moving factors impacting how much I can save and invest as well the market value of my portfolio might swing up and down in the future.

Option 1 Saving 250€ per month with 5,39% return

First option would be to save and invest 250€ per month which will be increased by 2% on an annual basis and have a dividend yield of 5,39% net of tax to be reinvested. This would yield a 1 million euro portfolio without any price appreciation (stock value increases). Important to remember that the portfolio does not start from zero at this moment, a over 50 thousand euro portfolio is fairly good yet nothing to brag about. I would have to save 232 444 euros of my own money over 40 years to get to 1 million, it does sound like a small amount compared to many other options out there. The reason for the quick growth comes from compounding, interest on interest growing at an exponential speed.

The graph below displays the above-mentioned case, the orange line displays dividend received per year (right y-axis) which will be reinvested into the portfolio and the blue staples show the year end value of my portfolio (left y-axis).

You can see that the dividends based on this model does not fulfil the goal as the calculations does not expect a full dividend for investments done during the year. For the investments done during the year only a quarter is expected to get the full annual dividend while the rest will then be received the year after.

This is one option to get to the goal and saving 250 euro per month which increases 2% per year should not be difficult under current circumstances. If I get fired or would end up unemployed for a long time, then the goal might be delayed by a few years. There are other risks that may delay it, sickness or any other that can impact my ability to work and earn. 

Option 2 Saving 200€ per month with 5,76% return

The second option I set up is a monthly saving of 200 euros that will increase by 2% on an annual basis. Here a requirement would be a yield of 5,766% per year, compared to 5,39% with monthly saving of 250 euros. We see that there is a very small difference between the return required between these two options and it all falls down to the 50 euro monthly difference. In this case I would only have to save 194 878€ of my own money to achieve a 1 million euro portfolio. By now you should understand that the difference is coming from the yield of my portfolio, if the yield drops then time to achieve my goal will be pushed further into the future unless I would save more. 

A yield of 5,76% per year is difficult, even though Warren Buffett, Peter Lynch, Charlie Munger, Joel Greenblatt and many more known investors have returned much more on an annual basis. As the future is unknown the returns are to a large extent unknown, businesses operating environment might change to which they need to adapt or wither away. 

The importance of yield and compounded interest

To give a little more perspective with lower expected returns I have made a similar graph with a monthly saving of 450 euros which would require a yield of 4,04% per year. The lower yield requirement might be expected under current market value, yield returns decrease as values increase.

With a monthly saving of 450€ and annual return of 4,04% I would need to invest 382 708€ of my own money, significantly more than in the two other options. As we see the yield is much lower, maybe not that much if we think about it, but over a period of 40 year it has a huge impact on portfolio returns and how fast it achieves a 1 million euro value. The graph below shows the 450€ monthly saving and 4,4% yield development.

 

Goal of million euro portfolio summary

These examples as you can see are all showing a smooth positive development every year. In reality we will see years of positive development as well as negative developments. Just recall March 2020 when the markets dipped and many thought the world will end, look at markets now, who would have thought values would be this high over a year ago. I expected a slower market recovery then we have seen, as we can conclude I was wrong on the recovery part. 

The goal I have set of a 1 million euro portfolio by 2061 is not impossible, but will require patience and focusing on continuing the same investment pattern as before. The compounding effect will be handled on my behalf and maybe the portfolio market value reaches the goal many years in advance, we shall see. 

To quickly explain why 1 million, it is more of a symbolic number to me and nothing more. Once I have reached it I will most likely continue investing as before, hopefully will be able to affect how companies work and make decisions on strategic levels as well as how companies form their culture and who they employ. This in order to increase the company value through increased dividends and market value in the long -run. Please note that in the end it is the employees who are the company, and they create the value for owners, hardly the other way around.