Instead of just looking at one year of returns, here’s an annual exercise that helps you look at the bigger picture. You may know the 10-year historical return of the S&P 500, but most of us didn’t just invest a big lump sum of money a decade ago, and most of us don’t just invest in the S&P 500.
Investment benchmark. There are many possible choices for an investment benchmark, but I chose the Vanguard Target Retirement 2045 Fund. This all-in-one fund is low-cost, highly-diversified, and available in many employer retirement plans as well open to anyone with an IRA. In the early accumulation phase, this fund is 90% stocks (both US and international) and 10% bonds (investment-grade domestic and international). I think it’s a solid default choice where you could easily do worse over the long run.
Investment amount. For the last decade, the maximum allowable contribution to a Traditional or Roth IRA has been roughly $5,000 per person. That means a couple could put away at least $10,000 a year in tax-advantaged accounts. If you have a household income of $67,000, then $10,000 is right at the 15% savings rate mark.
A decade of real-world savings. To create a simple-yet-realistic scenario, what would have happened if you put $10,000 a year into the Vanguard Target Retirement 2045 Fund, every year, for the past 10 years. You’d have put in $100,000 over time, but in more manageable increments. With the handy tools at Morningstar and a quick Google spreadsheet, we get this:
For every $10,000 you put in annually over the last 10 years, you would have a ~$80,000 investment gain on top of the $100,000 in contributions. For example, if you were a couple that both maxed out their 401k and IRAs at roughly $20k each or $40k total per year, that would leave you with a gain of roughly $360,000 over the last decade (and a total balance of $760,000).
Some of that money was invested right before the crash in 2008/2009, and some has only been in the market for a few years. $10,000 invested in the beginning of 2008 would have dropped down to $5,500 in value before the rebounding. Not every year will turn out to be as good as this year, but taking it all together provides a more balanced picture.
Earn money, save a big chunk of it, and then invest it in your choice of productive assets. Keep calm and repeat. The investment side of our path to financial freedom can be mostly explained by such behavior. (Add in maxing out a 401(k) each year as well if you can.) Something as accessible and boring as the Vanguard Target Retirement Fund can make you rich. You don’t need a secret trading strategy or exclusive hedge fund manager.
© MyMoneyBlog.com, 2018.