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The US stock market may be the best vehicle for creating wealth in the history of the world.
It has made millions of investors wealthy and is almost certain to continue to do so for generations to come. The total value of the U.S. stock market is now approximately $46 trillion, and anyone can take advantage of it. All you have to do is open a brokerage account and invest as much as you can.
Investing is best done over a long period of time because the power of compound interest allows you to accumulate wealth faster as your investment grows.
The chart below shows the value of $10,000 invested in. S&P500 A 50-year-old index fund (INDEX: ^SPX) helps illustrate the magic of compound interest.
^SPX data by YCharts
As you can see, that one investment grew to over $500,000, not including dividends. But what’s notable is that much of the wealth generated by that investment was created in the past few years. In fact, about half of that was earned in the past seven years, whereas before that it took him 43 years to earn the same amount.
Image source: Getty Images.
One way to become a millionaire
The S&P 500 is the best proxy for the U.S. stock market. The index includes 500 large-cap U.S. stocks. S&P Globalruns the index and updates the index frequently so that rising stars are added to the index and laggards are removed.
As a result, broad market indexes have a strong historical track record of creating wealth. Throughout its history, the S&P 500 has produced an average annual return of 9%, including reinvested dividends.
Then even a middle-class income will be enough to make you a millionaire over time. For example, $500 per month is less than 10% of the median monthly income for households in the United States. For example, if you were able to commit to investing $500 per month in an S&P 500 index fund like this: vanguard 500 fund (VOO 0.05%)You’ll end up with $1 million, which includes paying the ETF’s 0.03% expense ratio. That means he would pay 3 cents a year for every $100 he invested in an index fund.
Assuming an average growth rate of 9%, it would take 31 years for your investment to reach $1 million. This is assuming you are starting from zero. Also, over 31 years he only invested $186,000, meaning he earned more than five times the return on investment.
As in the graph above that tracks a $10,000 investment in the S&P 500, you can see that the returns are similarly weighted towards the end. According to calculations, it will take approximately 24 years to reach $500,000, but the remaining $500,000 will be earned over his next seven years. By the final year of that plan, your investment will have grown by nearly $100,000 per year and will continue to accelerate into the future.
Want to get there faster?
If you want to become a millionaire but don’t want to wait 31 years, you have several options. The easiest way is to invest more money. For example, if he can commit to investing $1,000 a month, he can achieve his goal within 24 years, and if he invests $2,000 a month, he can achieve his goal within 18 years.
Another variable, less controllable, is rate of return. If the S&P 500 outperforms its historical average and produces, say, a 12% annual return, investing $500 a month will bring him to $1 million in 26 years. You could try to find another ETF that outperforms the S&P 500, but that’s difficult, and even professional money managers have a hard time outperforming the overall market index.
Buying an ETF like the Vanguard 500 Fund and investing in it every month is one of the easiest ways to build wealth. You can’t become a millionaire overnight, but if you give yourself enough time, you can almost certainly become a millionaire.
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