Between 1928 and 1966, the S&P 500—a group of 500 of the largest stocks by market-capitalization—rewarded investors with 9.25% average annualized returns. From 1967 to 2006, investors enjoyed an 11% average annualized return. But just in case that makes you giddy with enthusiasm, S&P 500 average returns were only 7.1% between 2007 and 2018.
Stocks Tend To Grow Over Time
Much like a credit card given to you by a bank with the expectation of interest payments, you give money to someone, expecting a return on your investment. Both use the same guiding principle: compounding. The value of your initial investment grows exponentially over time. In simple terms, compounding is the cycle of generating additional returns on the money that you previously invested. To get a clearer idea, look at how these S&P 500 return percentages work out in real dollars. Imagine that you had invested $100 in the S&P 500 in 1928. Here’s what it might be worth over time: Despite the lofty annualized investment returns, results vary during individual years. Since the turn of the twenty-first century, the lowest annual-return year has been 2008, with a -36.55% annualized decline, while 2013 saw a 32.15% increase in value. During the prior 18 years, there were five negative-return years and 13 positive-return years in the S&P 500:
How Long Until You’re a Millionaire?
Based on the returns from previous years, see how long it might take you to reach a million dollars if you invest $5,000, $10,000, or $20,000 in an S&P 500 index fund. The tricky part of this calculation is in choosing a hypothetical future rate of return. Going forward, you can use a projected 8.5% long-term annualized return. By averaging the 10.09% returns from 1967 through 2016 with the lower 2007-2018 return of 6.87%, an 8.5% future return is a reasonable estimate. As the U.S. industrial base matures, and GDP growth slows, it’s reasonable to expect future stock market returns to temper. If becoming a millionaire is your goal, then investing in the stock market could be a good path. But as the numbers show, investing in the markets isn’t a get-rich-quick scheme. Financial-planning experts will remind you that stocks are a long-term route to wealth building. Finally, before diving into the financial markets, be sure to save up some emergency cash, so you won’t be forced to withdraw money from the markets during a downturn.
