How Does Investing Help Me & Why Is It Important?

Investing is one of the best ways to ensure you’ll have money for yourself, your family, and other loved ones once you retire. It comes in several exciting shapes and sizes like stocks, bonds, real estate, and precious metals. In today’s newsletter, I’m going to depict the power of the most common investment avenue, stocks. Enjoy!

A Brief History of the Stock Market

I know what you’re thinking: “A newsletter about history AND stocks? What a snooze-fest. zzzzzzz”. Okay, give me two paragraphs to explain…

Since 1928, the US stock market has produced a 10% return every year, on average. This means that if you invested $100 then, you would have over $700,000 today. Yes, 7,000x your money. Because of this return, stocks often outpace other investment types like bonds, savings accounts, and your Uncle John’s get rich quick scheme he told you about last Thanksgiving.

In comparison, US bonds, returned about half (5%) their stock counterpart since 1928. Although the return is halved, when annualized, that same $100 invested would only be worth ~$8,500 today. Yes only $8,500… How is this so? Because of compound interest. The difference of five and ten percent feels insignificant, but when including time, that extra 5% turns into a beautiful multiplier for our life of retirement.

Oops, I lied, here’s a third paragraph. Quick Tip: Bonds, savings accounts, and other investment avenues are very important and have a specific purpose that should be utilized, but in order to keep this short, they will be explained another day.

The Power of Investing, Time, and Contributions

Let’s say you start investing today with $100. If you contribute another $50 every month, you will have $157,000 after doing so for 40 years. This comes from an 8% annualized return (staying conservative compared to above).

In this 40-year example, your monthly contributions totaled $24,100 and your stocks earned over $120,000 in appreciation. For the price of one chipotle bowl per week, you have created over $150,000 of wealth for yourself. Yay free money!

Let’s say you want to be more aggressive. Once again starting with $100, but this time contributing $150 monthly instead of the previous $50. Let’s still assume an 8% return and a 40-year holding period. After all is said and done, your investments reached a level of $466,000. Pretty cool, huh?

Just for fun, let’s imagine someone with a great job living below their means for decades. They start with the same $100 and contribute a massive $1,000 per month for only 30 years. What will their results yield? Even after cutting off 10 years of investing, our most aggressive investor has created $1.3M of wealth in their account.

Two Quick Notes

First Note: Over a 100-year period, stocks go up 10% per year on average. When looking at individual years you’ll see significantly larger moves like +25% some years and -17% others. Take a look below at see what the market has done every year since 2000. The numbers depicted are %’s.

Second Note: The stock market return is based off something called the S&P 500 Index. Simply put, the top 500 US stocks are put into this index as a barometer for how the entire US economy is fairing. Many investors attempt to “beat” this index every year to prove their investing greatness. Beating the index means you achieved a higher return than the S&P 500. Most fail at this challenge and for new investors, putting money in a fund that mirrors the S&P 500 is a great way to start their investing journey.

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