I am a big fan of investing in private equity. At the time of this writing, I own about 35 individual stocks in my portfolio, and I believe that it is entirely possible for active investors to beat the market over the long term.
However, that does not mean you the need own private stocks to build wealth over time. In fact, although I own a bunch of private stocks, I have a large portion of my portfolio in low-cost indexes, including Vanguard S&P 500 ETF (BIRDS -0.30%).
In any given year, S&P 500Performance can vary greatly. In fact, since 1965, the S&P 500 has returned as much as 38% or as little as 37%. But over the long term, the S&P 500 has provided 9%-10% annualized returns depending on the exact period you’re looking at.
And you might be surprised how much wealth the average person can create by investing early and regularly in the S&P 500. As legendary investor Warren Buffett said, “You don’t have to do extraordinary things to achieve extraordinary results.”
How much would $1,000 invested per month in the S&P 500 grow?
Of course, while the S&P 500 has long been a reliable source of wealth, there is no way to predict its performance with absolute accuracy. If you invest for a period of 30 years, it is impossible to know what kind of annual income you will get.
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Therefore, for the purposes of this discussion, we will assume that the S&P 500 will average an annual return of 9.5% over the period invested. Some years, it will be more, others less, but we will assume that in three decades, you will get this. (Note: This is a conservative historical estimate. Since 1965, the S&P 500 has averaged 10.2 percent of total returns.)
We will also assume that you will reinvest any dividends you receive going forward.
With that in mind, if you were to invest $1,000 a month ($12,000 a year) in an S&P 500 index fund at a 9.5% growth rate, this is how your money would grow over time:
Time |
Total Amount Invested |
End Value at a CAGR of 9.5%. |
---|---|---|
5 years |
$60,000 |
$72,535 |
10 years |
$120,000 |
$186,724 |
15 years |
$180,000 |
$366,483 |
20 years |
$240,000 |
$649,467 |
30 years |
$360,000 |
$1,796,250 |
Data source: Author’s own calculations. Assumes a 9.5% compound annual growth rate (CAGR) and dividend reinvestment.
How much dividend income will this generate?
In short, if you put $1,000 into an S&P 500 index fund each month and earn an annual return of 9.5%, you’ll end up with about $1.8 million after 30 years.
Through January 2025, the Vanguard S&P 500 ETF’s dividend yield is about 1.2%, which is very low from a historical perspective given the current concentration of high-tech stocks that generally pay little or no dividends. But even at this low yield, an investment of $1.8 million would generate $21,600 a year in dividend income.
However, the average dividend yield of the S&P since 1960 is around 2.9%. While there is no way to know what the S&P 500’s dividend yield will be in 30 years, using this historical average would mean that an investment of $1.8 million would generate about $52,200 in annual dividend income.
Of course, this analysis made a lot of assumptions. And it’s important to mention that in 30 years, or whenever you reach retirement age, you probably won’t keep all your money in stocks. Smart asset allocation will involve gradually moving some of your money into fixed income instruments, such as bonds and CDs, which generally have higher yields and are more stable.
But the point of this is to show the long-term compounding power of seemingly boring investments and how it’s entirely possible to retire with millions of dollars (or more) without learning stock analysis or doing a lot of homework.
Matt Frankel has a position in the Vanguard S&P 500 ETF. The Motley Fool has a position in and recommends the Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.
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