With a 20-year investment perspective, you are considered to be a long-term investor. Put your money in the stock market, directly or through mutual funds containing stocks; the value of your investment may fluctuate, but over a longer time span, the average return has historically been higher than what safer investments such as bonds have offered.
Your stock or investment fund may be up 11% one year, down 6% the next, then rebound up 9% and so forth, so it's definitely a bumpier ride than safe and predictable options, such as a savings account or a certificate of deposit (CD). However, when the 20 years have passed, you are virtually guaranteed to come out ahead in terms of actual dollars in your account.
Safety comes at a price, while risk gets you a premium. Since you don't have to lose sleep over a stock market crash in a particular year, you get to reap the premium while the long-time span negates most of the risk.
Key Takeaways
- A long-term investor has a minimum of a 20-year time horizon; this time frame enables them to avoid playing it safe and to instead take measured risks, which can ultimately pay off in the long run.
- Dollar-cost averaging is a smart strategy for long-term investors as it involves investing a set amount at regular times, often monthly, regardless of market performance or the strength of the economy.
- Buying stocks and funds that provide dividends is another good technique for a long-term investor to use, as is automatically reinvesting those dividends.
- Compounding is a huge advantage for a long-term investor, with an asset's earnings reinvested to garner bigger earnings over time.
Dollar-Cost Averaging
With dollar-cost averaging, an investor sets aside a fixed amount at regular intervals, regardless of other circ*mstances. A classic example of this would be a 401(k). Dollar-cost averaging is a technique often employed by long-term investors.
If you invest a certain amount every month, you are buying shares in good times as well as bad times. In good times, the value of your shares increase. For example, suppose you start buying shares in a stock fund that cost $20 per share. You decide you will invest $100 every month. So that means you get five shares for your $100. A year later, the fund has done well and the share price has risen to $25. Now you only get four shares for your $100, but you're happy anyway; the five shares from that first month a year ago have appreciated in value, 5 x $25 = $125, netting a $25 gain. The second month, the shares were $21, so that month you got 4.77 shares, netting you a $19 gain, and so forth. In good times, you get fewer shares, which reduces the future potential upside, but it also means you have a nice total gain on your investment.
Suppose the share price had dropped from $20 to $15 in that first year. You'd have made a loss of 5 x $5 = $25 on your first month's investment. The second month you bought shares at $19 apiece, meaning you got 5.26 shares. The loss from the second month then becomes 5.26 x $4 = $21, and so on.
While that loss certainly stings, you are getting shares at a discount to the initial purchasing price, ultimately getting more shares for your monthly $100 investment. Since the share price is only $15, you can snap up 6.67 shares per month for as long as the slump lasts. When things brighten up six months later, you have purchased 6 x 6.67 = 40 shares at what might have been the bottom. Then, even with a modest rebound to $18 a share, you have now made a gain of 40 x $3 = $120 from those bargain shares alone. Meanwhile, the loss from the first month has shrunk to $10, the second month to just over $5 and so on, meaning you are already back in the black with a vengeance. When the share price returns to the original $20, the initial loss is completely wiped out, while the gain of the six months' bargain shares grows to 6 x $5 = $200.
If you keep your cool and stick with the plan even when the market is down, you get more shares for your money. These additional shares boost investment returns when the market rebounds. This is a big part of the reason why regular stock investors get a higher long-term return compared to safer investments despite the temporary ups and downs in the market.
Dividends
Many stocks and funds also give dividends to investors. The dividends are essentially profits given to the owners (shareholders) providing a couple of extra percent return on top of regular share price increases. Most mutual funds and stocks offer the option of automatically reinvesting the dividends. This is done in good times as well as bad times, meaning that you get dollar-cost averaging on what is essentially an invisible boost to your regular investment schedule.
With compounding, an asset's earnings are reinvested to garner more earnings; the profits occur as the investment is generating earnings from the original dollar amount and the built-up earnings from the previous periods.
The Math
Assume that you have decided to invest in a mutual fund with an average annual return of 7%, including the dividend. For simplicity's sake, assume that compounding takes place once a year. After 20 years, you will have paid 20 x 12 x $100 = $24,000 into the fund. However, the compounding return will more than double your investment. The easy way to run the numbers is using a calculator, but you can do the math manually by adding the new year's contribution to the old total and then multiply the new total by 1.07 for each year.
Year1:$1,200×1.07=$1,284
Year2:($1,284+$1,200)×1.07=$2,658
Year3:($2,658+$1,200)×1.07=$4,128
As the amount you have to invest grows over time, the variety of options for investing you have expands, enabling you to have an even more diversified portfolio.
Other Factors
In reality, your annual statement won't be as tidy as any calculator can predict. For starters, the math is usually heavily simplified in that it does not take into account any of the fees, taxes and similar factors. There's also some wiggle room in how it calculates the averages going into the equation. Still, history shows consistently superior returns for regular investing in stocks or stock funds compared to other types of investments, making it the obvious choice for a long-term investor.
A small sum such as $100 leaves little choice besides mutual funds or ETFs, at least in the beginning. Many brokers charge a transaction fee when buying stocks; unless you're dabbling in the risky penny stock barrel, that means you won't be able to diversify your portfolio. By contrast, mutual funds are premade portfolios of many different stocks with a clearly defined risk profile and built-in diversification.
However, the mutual fund charges an annual fee that can grow to a rather substantial size as your capital grows. If you are comfortable taking a more active role in selecting your investments, it may make sense to pull the money out of the fund after a few years and create your own diversified stock portfolio at a discount brokerage.
FAQs
After 20 years, you will have paid 20 x 12 x $100 = $24,000 into the fund. However, the compounding return will more than double your investment.
How much is $100 a month for 20 years? ›
After 20 years, you will have paid 20 x 12 x $100 = $24,000 into the fund. However, the compounding return will more than double your investment.
Is investing $100 a month in stocks good? ›
Key Takeaways
Investing just $100 a month over a period of years can be a lucrative strategy to grow your wealth over time.
How much will I have if I save $100 a month for 10 years? ›
(Enter "$100" in the "Contribution amount" field, then select "Monthly" for the "Contribution frequency" option.) You would end up with $32,023.26 after 10 years, compounded daily (assuming 365 days a year). The interest would be $10,023.26 on total deposits of $22,000.
How much will I earn if I invest $100 a month? ›
Investing $100 per month, with an average return rate of 10%, will yield $200,000 after 30 years. Due to compound interest, your investment will yield $535,000 after 40 years. These numbers can grow exponentially with an extra $100. If you make a monthly investment of $200, your 30-year yield will be close to $400,000.
What happens if you invest $1,000 a month for 20 years? ›
Investing $1,000 a month for 20 years would leave you with around $687,306. The specific amount you end up with depends on your returns -- the S&P 500 has averaged 10% returns over the last 50 years. The more you invest (and the earlier), the more you can take advantage of compound growth.
How much is $500 a month invested for 20 years? ›
What happens when you invest $500 a month
| Rate of return | 10 years | 20 years |
|---|
| 4% | $72,000 | $178,700 |
| 6% | $79,000 | $220,700 |
| 8% | $86,900 | $274,600 |
| 10% | $95,600 | $343,700 |
Nov 15, 2023
How To Save a Million Dollars in 20 Years
| Current Savings | Inflation Rate | Monthly Savings Goal |
|---|
| $0 | 3% | $1,959 |
| $10,000 | 3% | $1,883 |
| $100,000 | 3% | $1,201 |
May 13, 2024
If you've managed to save $300k successfully, there's a good chance you'll be able to retire comfortably, though you will have to make some compromises and consider your plans carefully if you want to make that your final figure.
What if I invested $100 a month in S&P 500? ›
It's extremely unlikely you'll earn 10% returns every single year, but the annual highs and lows have historically averaged out to roughly 10% per year over several decades. Over a lifetime, it's possible to earn over half a million dollars with just $100 per month.
Imagine you wish to amass $3000 monthly from your investments, amounting to $36,000 annually. If you park your funds in a savings account offering a 2% annual interest rate, you'd need to inject roughly $1.8 million into the account.
What if I invest $10,000 in stock market every month? ›
The 8-4-3 rule of compounding can be your way to achieve the Rs 1 crore corpus goal. Jiral Mehta, Senior Research Analyst, FundsIndia said that in this strategy, if you invest Rs 10,000 every month, assuming annual returns of 12 per cent, it takes 8 years to reach the Rs 16 lakh maturity amount.
How much should I invest a month to become a millionaire in 10 years? ›
Now, let's consider how our calculations change if the time horizon is 10 years. If you are starting from scratch, you will need to invest about $4,757 at the end of every month for 10 years. Suppose you already have $100,000. Then you will only need $3,390 at the end of every month to become a millionaire in 10 years.
What if I invest $200 a month for 20 years? ›
Investing as little as $200 a month can, if you do it consistently and invest wisely, turn into more than $150,000 in as soon as 20 years. If you keep contributing the same amount for another 20 years while generating the same average annual return on your investments, you could have more than $1.2 million.
How much is $100 a month invested for 40 years? ›
The numbers may surprise you -- in a good way
In fact, if you invest $100 a month over 40 years, you could end up with a portfolio worth $531,000. However, that number hinges on a very big assumption, and it's that your portfolio is generating an average yearly 10% return.
How much is $100 a month for 25 years? ›
You plan to invest $100 per month for 25 years and expect a 10% return. In this case, you would contribute $30,000 over your investment timeline. At the end of the term, your portfolio would be worth $133,889. With that, your portfolio would earn around $103,889 in returns during your 25 years of contributions.
How much money do I need to invest to make $4000 a month? ›
Making $4,000 a month based on your investments alone is not a small feat. For example, if you have an investment or combination of investments with a 9.5% yield, you would have to invest $500,000 or more potentially. This is a high amount, but could almost guarantee you a $4,000 monthly dividend income.
How much will I have if I invest $1000 a month for 30 years? ›
As a rule of thumb, the sooner you start saving for retirement the better. If you start by contributing $1,000 a month to a retirement account at age 30 or younger, your savings could be worth more than $1 million by the time you retire.
How much will $50 000 be worth in 20 years? ›
After 20 years, your $50,000 would grow to $67,195.97. Assuming an annual return rate of 7%, investing $50,000 for 20 years can lead to a substantial increase in wealth.
What if I invested $1000 in S&P 500 20 years ago? ›
2024, the S&P 500 has posted an average annual return of 9.74%, right about in line with its long-term average. Here's how much you would have now if you invested in the S&P 500 20 years ago, based on varying starting amounts: $1,000 would grow to $2,533. $5,000 would grow to $12,665.
Earning $2,000 in monthly passive income sounds unbelievable but is achievable through dividend investing. However, the investment amount required to produce the desired income is considerable. To make $2,000 in dividend income, the investment amount and rate of return must be $400,000 and 6%, respectively.
How much to save a month to be a millionaire in 20 years? ›
For example, it takes $1,400 per month to reach $1 million in 20 years. However if you can find 30 years to save, it only takes $475 per month to reach the same goal. This isn't easy, but finding the extra time may be easier than finding an extra $12,000 per year.
How much was $10,000 invested in the S&P 500 in 2000? ›
Think About This: $10,000 invested in the S&P 500 at the beginning of 2000 would have grown to $32,527 over 20 years — an average return of 6.07% per year.
How long in years will it take a $300 investment to be worth $800 if it is continuously compounded at 12% per year? ›
Thus, it will take approximately 8.17 years.
What happens if you invest $100 a month for 40 years? ›
In fact, if you invest $100 a month over 40 years, you could end up with a portfolio worth $531,000. However, that number hinges on a very big assumption, and it's that your portfolio is generating an average yearly 10% return. But achieving that 10% may be more doable than you'd think.
How much is $100 a month a year? ›
$100 monthly is how much per year? If you make $100 per month, your Yearly salary would be $1,200. This result is obtained by multiplying your base salary by the amount of hours, week, and months you work in a year, assuming you work 40 hours a week.
