The stock market is one of the best ways to generate wealth. When you invest your money in a stock, you become a part-owner of the company. You have executives and managers doing all the hard work for you while you sit back and watch your wealth accumulate.
In fact, investing in the stock market can help you turn an annual $5,000 investment into a cool half-million in just 30 years. Here’s how.
Where to invest your money
Picking a good company with a stock available at a fair price (or better) takes a lot of time and research. If digging into quarterly reports, learning about individual companies, and valuing stocks isn’t up your alley, there’s a much simpler solution. You can buy an index fund.
An index fund is designed to invest in a lot of securities all at once. Specifically, it’ll invest in most (if not all) of the securities represented by a specified index. A stock index tracks the performance of a group of securities designed to represent a certain segment of the market. For example, the S&P 500 Index tracks 500 (or so) of the biggest publicly traded American companies. The MSCI EAFE Index tracks companies based outside of the U.S. and Canada.
Index funds have much lower fees than actively managed mutual funds. So, by investing in a broad-based index fund, your investments can match the return of the overall stock market.
The best index funds have low fees and track their benchmarks closely. These days, you can usually find an index fund with a minimum investment of just $1.
A simple vehicle like an S&P 500 Index fund has historically produced returns of around 10% over the last few decades. That said, past returns are no indication of the future, and many analysts expect significantly lower returns going forward based on today’s high market valuation and current economic environment. A 7% return is a more reasonable expectation, especially when factoring in inflation.
Turn $5,000 annually over 30 years into $500,000
Now that you know where to invest your money, here’s how you can grow your portfolio from $5,000 to $500,000.
The key is investing consistently. Making a one-time investment of $5,000 in any given year probably isn’t going to get you to a half-million-dollar portfolio in the near future. But if you consistently put $5,000 into your preferred investments year in and year out, you’ll reach that $500,000 benchmark relatively quickly.
See how an annual $5,000 contribution adds up over time.
Value (Assuming a 7% Annual Return)
As you can see, if you invest $5,000 at the beginning of year one, it grows to $5,350 that first year. That’s your original $5,000 investment and an additional $350 in gains. If you keep investing $5,000 every year, you’ll reach $500,000 in 30 years. Meanwhile, you’ve only contributed a total of $150,000.
But you know the stock market doesn’t produce consistent returns every year. Some years it goes way up, some years it goes way down, and in other years it stays about flat. That’s why it’s important to invest consistently every year. When the stock market is up, you’ll buy fewer shares with your $5,000, but when it’s down, you’ll buy more shares. This is called dollar-cost averaging, and it can help minimize portfolio volatility by spreading purchases out over time.
While your returns might not look like the table above — in fact, they very likely won’t — consistently investing $5,000 into a broad-based index fund every year will get you to half a million in about 30 years. And if you keep going, a million-dollar portfolio is likely right around the corner.
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