Investing takes patience. You invest your money. You wait a while. Not much happens. You might gain a little, you might lose a little. After several years, you might start seeing an upward movement in your portfolio’s value. If you wait long enough, the gains clearly take center stage. You will amass wealth. If you wait decades, you might even become rich.
Some people have their own business. Some people land a job at a start-up that’s about to go IPO. Some people have wealthy relatives who leave them a sizable inheritance, but that’s not how it works for most people. The rest of us have to invest our money. The easiest way that most of us can build wealth is to invest in the stock market. Invest your money. Over time it will grow. You will build wealth automatically.
You could start by investing just $1,000 in the stock market. You might be thinking, “I don’t have $1,000 to spare.” I get it; most people don’t have a spare thousand dollars sitting around. I believe coming up with that money is not as tough as you might think. Most people can come up with that $1,000 pretty easily. You are probably spending about $3.00 a day on your morning coffee. Before you leave your house in the morning and head over to your barista of choice, take $3.00 out of your wallet and put it in your “piggybank.” Guess what, 333 days from now – about 11 months later – you will have that $1,000.
Invest $1,000 once, wait 40 years
So now you have your $1,000. Invest it in a low-cost S&P 500 index fund today. Forty years from now, you should probably have around $42,000. This estimate is based upon the average historical return for this index of 9.8% over the past 50 years. (The average return over the past 40 years was 10.96%; I elected to use a lower estimate just to be on the conservative side.) This annual return may be higher than is typically quoted because it includes reinvesting the dividends.
While past performance is no guarantee of future results, I think using the average return for a 50-year period is reasonable. Especially when that half-century included such notable declines as:
- Black Monday: October 19, 1987, the S&P 500 index lost 20% that day.
- The dot com bubble which burst in early 2001: The S&P 500 lost only about 28% from its peak a year earlier. The S&P 500 was certainly battered and bruised, but it avoided the massive declines witnessed by the technology companies. The tech heavy NASDAQ composite lost about two-thirds of its value during that same time-frame.
- The Great Recession of 2008/09: The S&P 500 lost roughly 50% of its value peak to trough.
Living through those market declines was difficult for many people. Imagine seeing quarter, a half, or even more of your money wiped out. It can be gut-wrenching. A lot of people bailed out of the stock market; having sold their investments at the worst possible time, as the market was at its lows, only to see the market rebound. Those who stayed the course we rewarded. The market historically has rebounded, eliminating all of those declines. Timing the market is difficult. Over the long term, an investment in the S&P 500 index fund has performed quite well. The index has continually outperforms approximately 80% of professional money managers.
Invest $1,000 annually, wait 40 years
We saw how much money a one-time investment of $1,000 can turn the thousand dollars into more than $42,000. What would happen if we invested $1,000 not just once, but every single year for 40 years? Again, it’s not hard to amass $1,000; remember, just put three dollar aside and at the end of the year you’ll have about $1,000.
This year invest $1,000 in an S&P 500 index fund. Next year, invest another $1,000. Repeat this process every year for 40 years. You will have more money working for you for many years. The more money you have in the stock market working for you for long periods of time, the more wealth you are likely to build. If we assume again, that we will see a roughly 10% return from the S&P 500 (including reinvesting those dividends) after 40 years, you will likely get have more than $500,000. Three dollars a day… half a million dollars. That’s zero to hero!
The more you earn, the more you could invest
Building wealth is your key to success. The more you are able to invest, the more money you will likely have. If you could invest $2,000 each year, you could be a millionaire 40 years later. You don’t have to invest the same amount every year, but the more you can invest, the more money you will eventually have. Many financial advisors suggest that you should invest at least 15% of your gross salary. Few among us are willing or able to set aside that much money for their future, but the longer your money is in the stock market the greater chance it has to grow.
Warren Buffett, self-made billionaire, second only to Bill Gates as the wealthiest person in the USA, amassed 99% of his wealth after reaching his 50th birthday.
photo credit: Jake Ingle