How would you like to turn $300 a month -- about $10 a day -- into a nest egg worth over a half million dollars? The chart below illustrates a very straightforward path that could have done just that for you. It shows what would have happened if you had invested $300 a month on the first trading day of each month into the SPDR S&P 500 ETF Trust (NYSEMKT:SPY) and reinvested your dividends.
That's it. That's all you would have had to do between February 1993 and April 2021 to turn $300 a month into just over $525,000. The incredible simplicity of that plan is why this one stock market chart will make you a better investor.
Why this is such a powerful strategy
The SPDR S&P 500 ETF Trust is an exchange-traded fund that attempts to track the S&P 500 index. That index contains 500 of the largest American companies , and when people talk about how "the market" performs, they often talk about it in terms of that index. That fund carries with it a low 0.09% expense ratio and has around a tiny 2% turnover, which means investors get market-like returns without being exposed to high overhead fees or churn costs.
By regularly buying $300 of that fund each month and reinvesting your dividends, you would have gotten returns very close to the overall market, without putting in much ongoing effort. You would also have been dollar-cost averaging your investments. By putting the same dollar amount in each month, you'd be buying more shares when the market was down and fewer shares when the market was up.
That's a great way to invest when you're worried that the market is too high, as well as to keep on investing when the market is moving against you. It's also something you may be able to make completely automatic through your broker so that you barely have to think about it once you have it up and running.
Despite that simplicity, the strategy turned $300 a month -- about $10 a day -- into just more than $525,000 in under 30 years. There are no guarantees that the market's future will be as bright as its past has been. Still, the one guarantee the market does have is that $0 a month invested for any length of time will always still be worth $0 when all is said and done.
What if the market drops or a company fails?
If you look closely at the above chart, you'll notice that there have been plenty of times when the value of the portfolio dropped. Notable dips include the early 2000s, after the dot.com implosion; around 2008, during the financial crisis; and more recently in early 2020, as the COVID-related economic restrictions went into place.
In each of those time periods, the lower stock prices meant that the continued $300 monthly investments and the reinvested dividends bought more shares for the same amount of dollars. Buying more shares at a lower price is a great way to get a bigger benefit from any subsequent recovery that may come.
While there are no guarantees that any given company will recover after a market crash, that points to another benefit of owning a broad-based index fund like the SPDR S&P 500 Index ETF. Even if some of the constituents of the fund fail entirely, as long as the U.S. remains a market economy, there will be other companies coming along to take their place.
Indeed, the approximately 2% turnover the fund has reflects the fact that the index constituents change from time to time. Yet as an owner of the fund, that management happens behind the scenes. As a result, over time, the fund will still represent an ownership stake in 500 of the largest American companies, even if those specific companies change.
Get started now
One more thing to note about that chart is that most of the growth in dollar terms happened near the end -- in the more recent years. This is an artifact of the way compounding works. If you earn a 10% return on $1,000, you get a $100 gain. If, on the other hand, you earn a 10% return on $100,000, you get a $10,000 gain. The same percentage increase results in a much larger dollar gain when you've got a larger pot of money to work with.
More months of adding money plus more months of compounding on top of the base means there's likely to be a bigger pot of cash in your later years of investing than in your earlier years. As a result, the sooner you get started, the better your chances are of winding up with a big enough nest egg so that you can see the benefits of compounding on a bigger pool of money in your later years. So get started now, and let that compounding get to work for you.