How different monthly investments can affect your future wealth

Accord­ing to a Gallup poll, a stag­ger­ing low num­ber of 37% Amer­i­cans younger than 35 are invest­ed in the stock mar­ket.

Gallup Econ­o­my and Per­son­al Finance Poll (Younger Amer­i­cans Less Like­ly to Invest In Stocks )

Sure, I get it, the 2008 finan­cial cri­sis hap­pened and peo­ple lost con­fi­dence. Even if the mar­ket’s long-term aver­age return is ~7% after infla­tion 1, peo­ple just don’t want to deal with the volatil­i­ty and the unfun times in the red.

Plus, psy­cho­log­i­cal­ly speak­ing, it’s tough. Like rid­ing a roller­coast­er on crack. And if you look at the mar­ket reg­u­lar­ly instead of the bet­ter alter­na­tive of ignor­ing it, well, you are just not going to be a hap­py camper.

Myself, I am major­ly invest­ed in the mar­kets. I save as much as I can from my low-ass salary and put it toward buy­ing low-cost, high-qual­i­ty ETFs that fol­low broad mar­ket index­es. I still have some holdover indi­vid­ual stocks from my ear­ly invest­ment career, but I am aim­ing to replace those. The end goal is to be invest­ed 100% in index­es and (almost) for­get I have mon­ey invest­ed at all.

Some reasons people don’t invest in the stock market

Some of the peo­ple I talk to dai­ly aren’t invest­ing and that’s main­ly because of two rea­sons:

  1. They don’t know much about invest­ing.
  2. They don’t think it’s worth invest­ing a small amount every month.

Regard­ing #1, I blame the edu­ca­tion sys­tem. Per­son­al­ly, I learned 5% through school (i.e: math) and 95% through my own research. And I only start­ed learn­ing after I had already invest­ed some mon­ey. For non-investors it might go like this in their heads: “I don’t invest because I don’t know about the stock mar­ket. But I don’t know about the stock mar­ket because I don’t invest”. Right!

#2 is direct­ly relat­ed to #1. If you don’t know about the stock mar­ket and about invest­ing in gen­er­al, you don’t real­ize the poten­tial gains from the mir­a­cle of com­pound inter­est. This con­cept sim­ply means that a small amount invest­ed peri­od­i­cal­ly over a long peri­od of time can become a big amount.

Building wealth through small monthly contributions

Let’s see it visu­al­ly. I will show you 3 dif­fer­ent port­fo­lios. All three of them start at $0. Every month, a dif­fer­ent con­tri­bu­tion is added to the port­fo­lio, either $50, $100 or $200. Below you can watch their growth.

The growth port­fo­lio assumes the pre­vi­ous­ly men­tioned infla­tion-adjust­ed 7% return rate of a port­fo­lio invest­ed in a low-cost ETF track­ing the S&P 500. Track­er fees have not been tak­en into account (with i.e: Van­guard you can have fees as low as 0,04%).

Here’s the raw data.

Month­ly Invest­ment
1 year$619,63$1 239,26$2 478,52
2 years$1 284,05$2 568,10$5 136,21
5 years$3 579,65$7 159,29$14 318,58
10 years$8 654,24$17 308,48$34 616,96
20 years$26 046,33$52 092,67$104 185,33
30 years$60 998,55$121 997,10$243 994,20

If for 30 years you put $200 month­ly in a reg­u­lar bank account, you will end up with $72000 (that’s with­out count­ing infla­tion!). If instead, you had invest­ed it in the stock mar­ket, you poten­tial­ly could have $243 994,20.

Of course, this is an ide­al sit­u­a­tion. In real­i­ty, your port­fo­lio can go down or up by 50% in a year. In the short term, Mr. Mar­ket’s mood can be fear­some indeed. In addi­tion, our own human psy­chol­o­gy can cause us to sab­o­tage our port­fo­lio: sell­ing high, buy­ing low, herd men­tal­i­ty, etc.

But it’s not impos­si­ble. No mat­ter where you are on your wealth build­ing career, whether you are a stu­dent strapped for cash or a mid­dle-aged pro­fes­sion­al look­ing to put your mon­ey to use. If you know your goals and you know your­self, it’s worth learn­ing a bit about the stock mar­ket and even invest­ing a small amount every month.

How about you, did you put month­ly mon­ey in the mar­kets when you were younger? Do you think we should all learn about invest­ing at school?


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