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I'm a big fan of investing in individual stocks. At the time of this writing, I own about 35 individual stocks in my portfolio, and I believe it's entirely possible for active investors to beat the market over long periods of time.
However, that doesn't mean you need to own individual stocks to create wealth over time. In fact, although I own a bunch of individual stocks, I have a large portion of my portfolio in low-cost index funds, including the Vanguard S&P 500 ETF (NYSEMKT: VOO).
In any given year, the S&P 500's performance can vary dramatically. In fact, since 1965, the S&P 500 has produced total returns as high as 38% or as low as negative 37%. But over long periods, the S&P 500 has produced 9%-10% annualized returns depending on the exact period you're looking at.
And you might be surprised at how much wealth the average person can create by simply investing early and regularly in the S&P 500. As legendary investor Warren Buffett has said, "It is not necessary to do extraordinary things to get extraordinary results."
How much would $1,000 per month invested in the S&P 500 grow?
Of course, while the S&P 500 has been a reliable wealth creator over very long periods of time, there's no way to predict its performance with complete accuracy. If you're investing over a 30-year period, it's impossible to know exactly what kind of annualized returns you'll achieve.
So, for the purposes of this discussion, we'll assume that the S&P 500 will average 9.5% annualized total returns for the entire time you're invested. Some years, it will be more, some less, but we'll assume that over the three-decade period, you'll get this. (Note: This is a historically conservative assumption. Since 1965, the S&P 500 has averaged 10.2% total returns.)
We'll also assume that you will reinvest any dividends you receive along the way.
With that in mind, if you were to invest $1,000 per month ($12,000 per year) into an S&P 500 index fund at a 9.5% growth rate, here's how your money could grow over time:
| Time | Total Amount Invested | Ending Value at 9.5% CAGR |
|---|---|---|
| 5 years | $60,000 | $72,535 |
| 10 years | $120,000 | $186,724 |
| 15 years | $180,000 | $366,483 |
| 20 years | $240,000 | $649,467 |
| 30 years | $360,000 | $1,796,250 |
Data source: Author's own calculations. Assumes a 9.5% compound annual growth rate (CAGR) and dividend reinvestment.
How much dividend income will this produce?
In short, if you put $1,000 into an S&P 500 index fund every month and achieved a 9.5% annualized return, you'd end up with about $1.8 million after 30 years.