A Brief Reminder on Saving and Investing
Before I show you how to simply and effectively manage that goal, let’s remind ourselves why we want to achieve it in the first place. The reason is pretty basic: compound interest.
The compounding effects of long-term investing are pretty dumbfounding. The average return on the S&P 500 since 1926 is nearly 10%. If we shorten this time period and take, say, 1950 as a starting point which is only 69 years ago, we get these results:
S&P 500 – 90 Year Historical Price Return (Non-Inflation Adjusted)
For a single dollar invested in 1950, the S&P 500 index has gone from 19.52 in October 1950, to 2986 as of today. Not including dividends (positive) and the impact of inflation (negative) that’s a 145-fold return in 67 years.
That being said, we have to account for the negative impact of inflation. Now if you didn’t touch the dividend income and you re-invested it in more shares, then your $1 would be worth $55 today in real terms. That’s a phenomenal return. If in theory today was October 1950 and I was writing this as a newspaper article, then my £1 million investments, left to batter on for 69 years with the same level of performance, would be worth £52 million in today’s money by that time in the future. However if you spent the income and interest each year, then $1 invested in 1950 would be worth approximately $15 in real spending power once you’ve accounted for inflation.
The lesson? Invest your money early, and re-invest income and dividends, over a long period of time to become truly wealthy.
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