Getting Off on the Right Foot

Even if you don't count home equity, the U.S. is home to more than three million millionaires, a group that Abba Genes resolves to join by age 56, if not sooner. A 24-year-old New Yorker who attends college during the day and works nights and weekends as a concierge, Abba picks the brains of friends and people he meets on the job for investment ideas, and he reads financial books and periodicals with the fervor of an ambitious Wall Street junior analyst.

Despite having to pay for school expenses and rent, Abba invests $250 a month in a Roth IRA and has so far accumulated $3,500 in Dodge & Cox International, an excellent foundation for his investment program. Abba wonders what else he should invest in -- and about his odds of joining the millionaires club.

Although Abba follows both funds and stocks, he doesn't own any individual shares. That's the right course for a beginner because you can't sufficiently diversify your portfolio with individual stocks if you invest just $250 a month. If Abba discovers later on that he has a talent for picking stocks, he could move in that direction -- provided that he has enough money to buy at least eight to ten issues.

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Funds win

But for most people, building a well-diversified package of solid, low-cost funds is the better way to go. Dodge & Cox International, with an expense ratio of 0.66% and a five-year annualized gain (to July 2) of 23%, is as good as they come (although, frankly, that fabulous return is unsustainable over the long term). Still, having all of his money in foreign stocks isn't prudent. For other sound choices, he should check the Kiplinger 25, the list of our favorite no-load funds, at kiplinger.com/investing/kip25.

The secret to building wealth is to invest early and often. If Abba can earn a yearly tax-deferred return of 8%, the $3,500 in Dodge & Cox would become $41,000 in 32 years. If he invests $4,000 annually in the Roth IRA at 8%, that would build another $580,000. Let's assume that next year Abba joins a company with a 401(k) plan. If he defers $5,000 a year to start, boosts his contribution by 4% a year and, again, receives an 8% return, the 401(k) would be worth $1.1 million by 2039. Altogether, he would have $1.7 million from saving and clocking normal portfolio returns.

There is a catch: the time value of money. In 32 years, the equivalent of $1 million today will be $2.2 million, assuming a long-term inflation rate of 2.5% a year. At 4% inflation, it would take $3.5 million to equal today's $1 million. The economist in Abba would tell him that to make his number of $2.2 mil, he'll need to start by setting aside more than $10,000 a year, raise the amount regularly, earn double-digit returns and augment his fund gains with other profits, possibly from astute real estate dealings. No one ever said it's easy to become a millionaire. But you can always dream.