Do you want to know how to turn a little money now into a lot of money tomorrow? Most likely, if you’re reading this, you do. Even if you start out with almost nothing, investing in stocks is one of the few ways to accumulate a large amount of money inside a single lifetime. In fact, if you manage things well, a small investment of $20,000 might grow to reach as much as $350,000. Here is how to do it.
Yes, all the way from here to there.
Does it seem too wonderful to be true? It’s not. It is both conceivable and probable to put a symbolic down payment of $20,000 on a pleasant future supported by a $350,000 savings account. However, there is a catch.
First things first, however.
Let’s just use the S&P 500 (GSPC 1.53%) index as our stand-in for the whole stock market for the sake of simplicity. It is definitely feasible to get wealthy by owning individual stocks, but it is simpler—and sometimes just as effective—to just invest in a basket of equities like the S&P 500 itself.
Let’s also suppose that the present will mostly resemble the past. In other words, let’s suppose that, like in previous decades, the S&P 500 will increase by an average of 10% annually. Some years are better than others, and on occasion the market even posts a year-long loss. But given enough time, 10% annual returns are a realistic expectation.
If you invest $20,000 in an S&P 500 index fund today it should be worth around $350,000 thirty years from now.
To be successful with stocks in this way, there are two caveats.
The two primary success factors
One of these factors relates to how your investment is handled once it is made. Any profits after investing should be immediately reinvested back into the market. Likewise for any profits received.
It is known as compounding. By earning future profits on earlier gains rather than only on your original principle, this strategy makes sure that you have as much of your money as possible working for you for as often and as long as feasible. Your average yearly return on an S&P 500 index fund is almost halved if you don’t reinvest your profits.
The other (related) caveat is that it takes a full 30 years to realize this kind of long-term advantage. You won’t succeed nearly as well if you settle for less.
Only the latter seven years of the 30-year period, which included half of the $330,000 net gain, were successful. In other words, if you held onto a $20,000 investment for about 23 years, you would only have a little bit more than $160,000 at the end of that period. That’s a significant difference, especially if your retirement fund will cover the majority of your expenses.
Naturally, this implies that you should start investing your money as soon as you can.
Better to take action than to do nothing at all.
In order to be clear, the scenario above implies you’ll only invest $20,000 once in the stock market and never add more money. However, you’ll probably be able to add more money as you go. Over the course of 30 years, even a little increase in yearly investment may have a significant effect. For instance, in the above scenario, increasing your assets by only $2,000 per year would increase your ultimate nest egg to around $680,000.
However, the fundamental lesson is the same in both cases. That is to say, it is well worth the time and effort to enter the stock market as soon as possible. When you start to get progressively more income from your prior profits and dividends, a very small stash might grow to an unexpectedly large one.
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