People naturally have different definitions of what it is to be rich. A person with vast wealth may view a million pounds made in the stock market as chump change. Meanwhile, someone with a seven-figure account could be seen as very well-off.
Like many things in life, I suppose it’s a matter of perspective.
However, nobody can deny that over long periods of time the stock market has been a wealth-generating machine.
The 50-year figures for the S&P 500, for example, speak for themselves:
It gained value in 40 of the past 50 years
$1,000 invested in the index in 1972 would be worth around $47,000 today
19 of the last 50 years have returned 20% or more
There have been losses of 20% or more in only three years
Of course, this is the long-term trajectory. It’s a different story day to day, with all the market headlines and noise. It’s very easy to lose sight of the bigger picture.
Could I become a millionaire from £500 a month?
Someone’s sitting in the shade today because someone planted a tree a long time ago.
Warren Buffett
Long term, the S&P 500 has delivered an average annualised return of around 10% (with dividends reinvested). While that level of return isn’t guaranteed moving forward, it does show why the index is so popular with investors.
With an average 10% annual return, it would take me 29 years investing £500 a month to reach a million pounds. And that’s starting from scratch.
Of course, the stock market is highly inconsistent from one year to the next. That means results can deviate significantly from the average.
Plus, the S&P 500 is obviously denominated in US dollars, so there would be currency swings (and inflation) for UK investors that aren’t factored in here.
Nevertheless, it’s amazing to think that I could go nothing to a million pounds in 29 years by investing in stocks.
No wonder Albert Einstein is thought to have called compound interest the eighth wonder of the world!
Could I beat the market average?
We’ve seen the average stock market return over time. But what are the chances of me outperforming it?
Well, between 1965 and 2022, Warren Buffett’s Berkshire Hathaway achieved an annualised return of 19.8% (about double the market average).
But the Oracle of Omaha is one of the world’s greatest investors, so it’s unrealistic for me to replicate that.
Still, I think it’s worth highlighting the top-performing US stocks over the last decade (as of April 2023):
Stock
10-year total return
Nvidia
+8,833%
Tesla
+6,304%
Plug Power
+5,477%
Horizon Therapeutics
+4,263%
Advanced Micro Devices
+3,691%
Tesla and Nvidia have hardly been ‘secret’ stocks over the last 10 years.
So it was perfectly possible for any investor to have bought and held shares such as these. And had they done that, they would have likely crushed the average market return.
Rome wasn’t built in a day
No matter how great the talent or efforts, some things just take time. You can’t produce a baby in one month by getting nine women pregnant.
Warren Buffett
The necessary ingredients for building long-term wealth in the stock market are patience, consistency, and the appropriate long-term mindset. A tree takes time to grow, and so does wealth.
The post Could investing £500 a month in the stock market make me rich? appeared first on The Motley Fool UK.
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Ben McPoland has positions in Nvidia and Tesla. The Motley Fool UK has recommended Nvidia and Tesla. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.