President Donald Trump is pushing legislation that would provide newborns with $1,000 in a savings accounts. It's an intriguing idea, and when you consider the effects of compounding and long-term investing, it's not hard to see how such an account could grow significantly in the long run if it's invested in the right way.
The big benefit newborns have is time. Unlike most investors, who may have 20, 30, or even over 40 years until they retire, newborns have even longer. Below, I'll look at how much a $1,000 investment over a period of 50-plus years could grow.
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An easy long-term option for investors to consider for their kids
When you're looking at investing for the very long haul, an exchange-traded fund (ETF) makes a lot of sense. As great of an investment as a stock like Nvidia has been recently, it's impossible to forecast how it may perform over the next 50 years. The benefit of ETFs -- which owns shares in lots of stocks -- is that they will rebalance over time and adjust according to which stocks are doing well and which ones aren't. ETFs that track the S&P 500 stock index can be particularly attractive.
The S&P 500 is a collection of the top 500 stocks that are listed on U.S. exchanges. The index has averaged an annual return of 10% over the long term, though that includes years when it went up and years when it went down, as well as lots of nerve-wracking volatility along the way. Yet investing is enticing. Consider that an investment today would grow to more than 490 times its original value after 65 years of compounding, assuming a 10% annual growth rate. That means investing just $2,041 today would be enough to end up with a portfolio worth at least $1 million after such a long time frame, in this optimal scenario.
There are never guarantees when it comes to future returns, however. The growth rate may slow down, and your investment could be down when you need it. But oftentimes, investors are better off simply investing in the broad index than trying to pick individual stocks. It may not be as exciting as picking stocks yourself, but it's a simple way for you to grow your wealth. One fund that you can invest in that tracks the index is the SPDR S&P 500 ETF (SPY 1.31%).
How much can a $1,000 investment grow over 50-plus years?
Investing $1,000 and just letting it sit in the SPDR S&P 500 ETF can be a no-nonsense way to grow your portfolio's value over the years. Since that is a small balance, it could, however, take a while for it to reach a significant value (e.g. six figures). But once it does, then the benefits of compounding become far greater. In the table below, you can see the significant change in a portfolio balance from year 50 to 65, which is a difference of hundreds of thousands of dollars -- simply from leaving the money invested for those years.
| Year | 9% Growth | 10% Growth | 11% Growth |
|---|---|---|---|
| 50 | $74,358 | $117,391 | $184,565 |
| 55 | $114,408 | $189,059 | $311,002 |
| 60 | $176,031 | $304,482 | $524,057 |
| 65 | $270,846 | $490,371 | $883,067 |
Calculations by author.
The downside is that over the course of 50 years, inflation will also significantly chip away at the purchasing power of all this money. But it's a great example of how a modestly sized investment today could grow to be worth much more over the very long haul. And by putting the money into a low-risk ETF, you don't have to track any stocks or worry about making any changes along the way. It's an easy way to invest in the stock market and benefit from its long-term growth.
Even if you're not planning for your child's retirement and the $1,000 from the government doesn't come through for your baby, investing in the SPDR S&P 500 ETF can be a great way to help them later on in life.
