How My "20% Solution" Could Make You a Millionaire

Do you want to become a millionaire? This is obviously a rhetorical question... the majority of us would love it. But what's your plan for achieving this goal?

If your plan is to make this sort of wealth in the stock market, then what's your strategy? Blue-chip stocks, index funds, or are you an income investor who wants to watch your dividend "paychecks" (as my colleague Amy Calistri would say) roll in by the truck load?

  All of these strategies are great. There's nothing wrong with them, besides 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 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, then you need to follow something I like to call the "20% 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 80% of my portfolio to safe and reliable assets. The kind I know will allow me to meet my comfort level and feel confident knowing I can adequately provide for my family.

But the other 20%? 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 (80%) of your portfolio tied to dependable assets, I think a portion -- the other 20% -- needs to go toward investments with the potential to knock the cover off the ball.

Here's how the 20% 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 2001 through 2010 for the S&P 500 was a measly 3.0%. This means $25,000 turned into $33,597.91 during 10 years.

But these numbers can change dramatically when you add in the potential for just a few big winners.

Let's say you invest 80% of your $25,000 portfolio, or $20,000, in the broader market to achieve that 3% return. Then you allocate the remaining 20%, or $5,000, 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, then the initial $5,000 would grow into $68,929.25 after 10 years.

Add in the $20,000 and its market return, which would have grown to $26,878.33, and you'd have gotten a pretty nice nest egg of $95,807.58 -- roughly triple the first portfolio, all thanks to where you put just 20% of your money.

(Note: You'll notice 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 20% solution?

I think the answer is obvious…

Now you may be asking, if the 20% 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 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. And 20% 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.

> 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, then I can't think of any better route.