The investing part can be very easy — and the rest is just math.
You can really turn any sum into any other sum if you invest in the stock market. Indeed, if you approach investing with little knowledge and, knowingly or unknowingly, take on a lot of risk, you can turn one sum into a much smaller sum.
But you’re here, and you’re interested in amassing wealth, so let’s focus on how to do that with stocks. Here’s how you might turn an initial investment of $10,000 into $1,223,459.
Stock investing — and index funds
For those not too familiar with the stock market, it might seem confusing or intimidating — or complicated. It certainly can be complicated, depending on how you’re going about your investing, but it can be surprisingly easy, too — if you just stick with index funds.
An index fund is a mutual fund — or an exchange-traded fund (ETF) — that doesn’t need lots of well-paid financial professionals to keep studying the universe of investments, making decisions about what to buy and sell in the fund and when to do so. Instead, an index fund just holds whatever is in the index it’s tracking — and it delivers roughly the same return, less fees. (Index funds tend to have very low fees compared to more actively managed investments.)
What kind of return can you expect from an index fund, then? Well, it all depends on the index it’s tracking. If it tracks a bond index, for example, you’ll get roughly the same return as that index (less fees).
It’s hard to beat the stock market, though, for your long-term dollars — those you won’t need for at least five years, if not 10. Over many decades, the overall stock market has averaged annual returns of roughly 10%. You can’t expect that in your investing time frame, though — you’ll likely average more or less.
It’s all math
With that long-term average annual return for the stock market of roughly 10% in your head now, we can look at how it can turn $10,000 into $1,223,459. It’s all just math.
Imagine that you took $10,000 and invested it in the stock market and earned an average annual return of 8%. You would end up with around $1.2 million — eventually. But here’s some bad news: It would take around 63 years! What if the market averaged 10% annually? Well, then, it would only take a bit more than 50 years. Hmm.
Fortunately, you can easily do better than that — by investing money in the stock market every year — perhaps even every month. (Many people simplify their financial lives by having their employer automatically send a specified portion of their paycheck to a specified account — this is a great way to put much of your finances on autopilot.)
The table below shows how much you might amass over time if you regularly invested certain sums into the stock market, averaging annual growth of 8%.
|
Growing at 8% for |
$10,000 Invested Annually |
$15,000 Invested Annually |
$20,000 Invested Annually |
|---|---|---|---|
|
5 years |
$63,359 |
$95,039 |
$126,718 |
|
10 years |
$156,455 |
$234,683 |
$312,910 |
|
15 years |
$293,243 |
$439,865 |
$586,486 |
|
20 years |
$494,229 |
$741,344 |
$988,458 |
|
25 years |
$789,544 |
$1,184,316 |
$1,579,088 |
|
30 years |
$1,223,459 |
$1,835,189 |
$2,446,918 |
Calculations and chart by author.
See the $1,223,459? You can get there in just 30 years. Invest more each year, and you’ll get there even faster — annual investments of $15,000 can get you there in a bit more than 25 years, and $20,000 per year can get you there in about 22 years.
More risk for more return
If you’re willing to spend time and energy studying investing and then studying companies to carefully select some individual stocks in which to invest, you may well get to your $1,223,459 even faster.
Consider, for example, growth stocks. They belong to companies growing at a faster-than-average rate, and while they can be more volatile and riskier than average stocks, many also have the potential to increase in value at a faster-than-average rate. If you’re going to invest in individual stocks — which you might do along with index funds — take a look at our Motley Fool investing philosophy, which suggests buying 25 or more stocks and aiming to hold them for at least five years.
However you go about it — whether taking the 60-year route or a shorter one — it’s well worth aiming to amass a sizable nest egg for your retirement years. After all, they may be retirement decades, and you’ll need to be able to support yourself through it.
