How to Get Rich Slow With Investing in the S&P 500

Getting Rich SLOW- Get rich slow? Who would want to get rich slow? Why not just get rich fast, I want my money now! There are so many get rich quick schemes out there, but the truth is that slim to none are actually viable. If you plan on doubling your money in a week with stocks, you’re not investing, you’re just gambling. Getting rich with stocks is like story of the tortoise and the hair. The slow, tortoise always wins!

S&P 500 Performance- The S&P 500 is probably the most common benchmark for overall stock market performance. This is because the S&P 500 covers 80% of the market. To give you an idea of what type of returns you will get in the stock market, I’ll talk about long term S&P 500 performance. People measure the performance of the S&P 500 in different ways. Some people adjust it for inflation, others don’t, some people include dividend reinvestment, others don’t. Since 1940, the S&P 500 has brought a 7.37% return. But, if you include dividend payments that you reinvest back into your portfolio, that return increases to 11.16%. But then there is inflation. Many people think you should adjust the returns for inflation. If you do that the S&P 500 falls back to 3.55% since 1940. Then when dividends are reinvested, it is a 7.21% return. 

How Do Actively Managed Mutual Funds Match Up?- The purpose of mutual funds is to outperform the general market or the S&P 500 and give you the greatest return possible. But how many of them actually do? CNBC released an article about 2 years ago comparing the two. Over a 15 year period, 91.6% of actively managed funds underperformed the S&P 500. Data has shown that the longer you’re investing for, the harder it is for actively managed funds to beat the market. The main reason it’s hard for investors to make more money in actively managed funds is because of the fees. 

The Famous Bet- Warren Buffet, one of the most famous and influential investors of all time is a huge believer in index funds. He has said that the best way for investors to invest in common stock, is through low cost index funds. He was so confident in this that he decided to bet some of the brightest men on wall street. He bet hedge fund managers 1 million dollars that a low cost index fund will outperform their funds over a 10 year period. He was right. Warren Buffet said that the returns that they get don’t justify the high fees they charge.

Compound Interest- Compound interest or “interest on interest” is when your money that makes you money goes ahead and makes you even more money. This is when instead of taking profits from your investment, you just reinvest it. It’s kind of hard to explain, so here is an example. Let’s say you start with just 1,000$, and you make 10% every year. (About the performance of the S&P 500). So after one year, your money has grown to 1,100$. But the next year, instead of gaining 10% on 1,000$, you are gaining 10% on 1,100$. So after year 2, you will have 1,210$. After year 10, your initial 1,000$ investment will have grown to 2,593.74$. If you would have taken your profit every year, you would have only gained 1,000$ in profits, but since you let your money grow, you have profited 1,593.74$

Roth IRA- A Roth IRA is an investment vehicle for retirement. IRA means Individual retirement account, and roth means you pay no taxes on your gains. An investment vehicle is something that you put investments in, it is not an investment itself. Some investments you might put in here are mutual funds, index funds, single stocks, and even real estate. In normal circumstances, when you sell an investment that has grown in value, you need to pay taxes on your gains. This is called a capital gains tax. But with a Roth IRA, all of your gains grow tax free. Since this vehicle is so powerful, you can only contribute 6,000$ a year. This option is such a great option for young people who are setting money aside for retirement. Tax free gains!

How to Retire With Over 8,000,000$- Now this might seem pretty far-fetched. If you understand these three concepts it totally makes sense! S&P 500 average performance. Compound Interest. And the investment vehicle, the Roth IRA. Our investing strategy is going to be investing 500$ into a low cost S&P 500 index fund every month from age 17 all the way until age 65. Since the Roth IRA has a maximum contribution limit of 6,000$, let’s aim to max it out! If the S&P 500 will bring a 11.16% return with dividends reinvested, at age 65, you will have accumulated a nest egg worth 8,576,357.56$ Keep in mind, you would only have had to put in 288,000$ over your whole lifetime. You would multiply your money by almost 30 times!