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.
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:
- They don’t know much about investing.
- 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.
|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?
The Oracle of FI is a middle-class guy working as a software developer. His goal is to achieve full financial independence by the age of 40.
He started this blog in 2019 in order to share his tips and techniques on investing, saving money and making the most out of life.
He has a cat and lives in France.