This 1 stock chart will make you a smarter investor

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How would you like to turn $ 300 a month – about $ 10 a day – into a nest egg worth over half a million dollars? The table below illustrates a very simple path that could have done this for you. It shows what would have happened if you had invested $ 300 per month on the first trading day of each month in the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) and reinvested your dividends.

That’s it. That’s all you should have done between February 1993 and April 2021 to turn $ 300 per month into just over $ 525,000. The incredible simplicity of this plan is why this stock chart will make you a better investor.

Chart by author based on data from Yahoo! Finance.

Why it’s such a powerful strategy

The SPDR S&P 500 ETF Trust is an exchange-traded fund that tries to track S&P 500 index. This index contains 500 of the largest US companies, and when people talk about “market” performance, they often talk about it in terms of this index. This fund has a low expense ratio of 0.09% and turnover of around 2%, which means investors achieve market-like returns without being exposed to high overheads or costs. unsubscribe costs.

By regularly buying $ 300 of this fund each month and reinvesting your dividends, you would have achieved returns very close to the overall market, without much continuous effort. You would also have had a dollar cost by averaging your investments. By putting in the same amount each month, you would buy more shares when the market was down and less shares when the market was up.

This is a great way to invest when you fear the market is too high, as well as keep investing when the market moves against you. This is also something that you may be able to make completely automatic through your broker so that you hardly have to think about it once you have it up and running.

Despite this simplicity, the strategy turned $ 300 per month – about $ 10 per day – into just over $ 525,000 in less than 30 years. There is no guarantee that the future of the market will be as bright as its past. Yet the only guarantee the market has is that $ 0 per month invested for any length of time will always be worth $ 0 when all is said and done.

What if the market goes down or a business goes bankrupt?

Sad investor looking at stock charts pointing down.

Image source: Getty Images.

If you look closely at the chart above, you will notice that there have been many times the portfolio’s value has fallen. Notable declines include the early 2000s, after the dot.com implosion; around 2008, during the financial crisis; and most recently in early 2020, with the implementation of COVID-related economic restrictions.

During each of these periods, declining stock prices meant that continued monthly investments of $ 300 and reinvested dividends bought more stocks for the same amount of dollars. Buying more stocks at a lower price is a great way to gain a greater benefit from any subsequent reversals that may arise.

While there is no guarantee that a given company will recover from a stock market crash, it indicates another advantage of owning a broad-based index fund like the SPDR S&P 500 Index ETF. Even if some of the fund’s constituents fail entirely, as long as the United States remains a market economy, other companies will come and take their place.

This is because the fund’s turnover rate of around 2% reflects the fact that the constituents of the index change from time to time. However, as the owner of the fund, this management is done behind the scenes. As a result, over time the fund will still represent an equity stake in 500 of the largest US companies, even if those specific companies change.

Start now

Another thing to note about this graph is that most of the dollar growth has happened towards the end – in the last few years. This is an artifact of how the composition works. If you get a 10% return on $ 1,000, you get a payout of $ 100. If, on the other hand, you get a 10% return on $ 100,000, you get a gain of $ 10,000. The same percentage increase translates to a much larger dollar payout when you have a larger amount of money to work on.

More months adding money and more months compounding on top of the base means that there will likely be a bigger pot of money in your later years of investing than in previous years. As a result, the earlier you start, the better your chances of ending up with a nest egg big enough that you can see the benefits of capitalizing on a larger pool of money in your later years. So start now and let this composition get to work for you.

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