May and June are graduation season, and if you haven't decided what to get for the new grad in your life, you may want to consider gifting them an investment. It may not be as flashy as a car or trip abroad, but that investment is likely to grow over time. In the process, it can not only underscore just how valuable investing can be but also how simple it can be as well.
Beginners often believe successfully investing in the stock market must be a complex undertaking that requires years of experience and countless hours of research. But picking a good investment can be much easier than that. Tracking a broad market index such as the S&P 500 (^GSPC 0.52%) is arguably the simplest way for anyone to get started, and your gift can put the new grad you know on the right path.
Image source: Getty Images.
Why an investment in the S&P 500 makes sense for new grads
The biggest advantage young investors have is time. The problem is that many students and young professional aren't thinking about saving for retirement. Even if they are, they're often financially unable to do so as they grapple with student debt, rent payments, and other adult responsibilities. Or worse, they're most interested in finding the next big growth stock or chasing meme stocks. Investing in the safe and dependable S&P 500 probably doesn't rank too highly in any of these scenarios.
But with decades ahead of them, new grads will benefit immensely from the effects of compounding. The S&P 500 has grown an average of 10% per year in its history, enough to mint a sizable nest egg for patient investors (more on this below). And beyond this attractive rate of return, the index is made up of 500 of the largest U.S. companies with exposure to all of the major sectors, industries, and geographic markets.
Here's how much your gift could grow over time
Though I've been talking about the benefits of investing in the S&P 500, you can't just buy a piece of the index. Instead, you can invest in an exchange-traded fund (ETF) that tracks it and offers very similar returns. A popular option is the SPDR S&P 500 ETF (SPY 0.50%). This low-cost fund has an expense ratio of just 0.0945%, so for every $1,000 you have invested in the ETF, you lose less than $1 per year to management fees. When investing over the long term, high expense ratios can add up to hundreds and thousands of dollars.
Over the past decade, the SPDR S&P 500 ETF has grown more than 180%. Including dividends, its total return climbs above 230%.
Data by YCharts.
That works out to a compound annual growth rate (CAGR) of 12.7% over the past 10 years, which is higher than the S&P 500's historical average.
But taking a slightly more conservative approach and assuming the index and ETF will deliver a 10% annual return long term, here's how different sized gifts -- all invested in the SPDR S&P 500 ETF -- could grow for a new grad:
| Gift Amount | 20 Years | 30 Years | 40 Years | 50 Years |
|---|---|---|---|---|
| $100 | $673 | $1,745 | $4,526 | $11,739 |
| $200 | $1,345 | $3,490 | $9,052 | $23,478 |
| $500 | $3,364 | $8,725 | $22,630 | $58,695 |
| $1,000 | $6,727 | $17,449 | $45,259 | $117,391 |
| $2,000 | $13,455 | $34,899 | $90,519 | $234,782 |
| $3,000 | $20,182 | $52,348 | $135,778 | $352,173 |
Table and calculations by author.
Your gift could become a five or even six-figure sum if its recipient is patient enough to let compounding do its magic. Though inflation will diminish the purchasing power of the estimates above, this is still a great example of how a simple investment in the stock market can become a major windfall for young grads, even if retirement planning is the last thing on their minds.
