Put $10,000 in the S&P 500 ETF and Wait 20 Years (2024)

Compare the Best Online Brokers
CompanyCategoryInvestopedia RatingAccount MinimumBasic Fee
Fidelity InvestmentsBest Overall, Best for Low Costs, Best for ETFs4.8$0$0 for stock/ETF trades, $0 plus $0.65/contract for options trade
TD AmeritradeBest for Beginners and Best Mobile App4.5$0$0 for stock/ETF trades, $0 plus $0.65/contract for options trade
TastyworksBest for Options3.9$0$0 stock/ETF trades, $1.00 to open options trades and $0 to close
Interactive BrokersBest for Advanced Traders and Best for International Trading4.2$0$0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value

What If You Had Invested in Just the S&P 500?

People often use the S&P 500 as a yardstick for investing success. Active traders or stock-picking investors are often judged against this benchmark in hindsight to evaluate their savvy.

Let's take a historical example: Soon after Donald Trump entered the race for the Republican nomination for president, the press zeroed in on his net worth. Financial experts have pegged his net worth at $2.5 billion. One of the cornerstones of Trump's campaign was his success as a businessperson and his ability to create such wealth. However, financial experts pointed out that if Trump liquidated his real estate holdings, which were estimated to be worth $500 million, back in 1987, and invested them in the S&P500 Index, his net worth would be as much as $13 billion in 2015.

It is just one more example of how the S&P 500 Index continues to be held up as the standard by which all investment performances are measured. Investment managers are paid a lot of money to generate returns for their portfolios that beat the S&P500, yet on average, most don't.

This is the reason why an increasing number of investors are turning to index funds and ETFs that simply try to match the performance of this index. If Trump had done so back in 1987, he would have made 26 times his money for an average annualized return of 12.3% by the time he was inaugurated (from 1987 to 2015—the date of calculation for projected net worth). But hindsight is 20/20, and he could not have known that.

If you invested $10,000 on the first trading day of January 2001 in the S&P 500, it would have been worth around $45,227 by the end of 2022.

Using Hindsight to Predict Future Performance

Because past performance is no indication of future performance, no one can say whether the stock market will perform the same way in the next 20 years. However, you can use past performance to create some hypothetical scenarios that allow you to consider possible outcomes. To do that, look at the 20-year performance of the S&P 500 at various intervals as an indication of how it might perform under similar circ*mstances in the future.

One of the biggest reasons why it is impossible to predict stock market returns over a long period of time is because of the existence of black swans. Black swans are catastrophic, unexpected events that can alter the course of the markets in an instant and whose impact may be felt for years to come. Such events are called black swans because they appear so rarely, but they appear often enough that they have to be accounted for when looking into the future.

The terrorist attacks on Sept. 11, 2001, were a black swan event that impacted the economy and the markets for years. Other examples of black swan events are the global financial crisis of 2008 and the COVID-19 pandemic that erupted worldwide in March 2020.

You also have to consider the market cycles that can occur within a 20-year span. For example, in the 20-year span from 2001 to 2020, the S&P 500 had three distinct bull markets and three bear markets.

Research from Invesco shows that from the period of November 1968 through December 2020—a span of more than 50 years—the average length of a bull market was 1,764 days (or approximately 58 months), while the average bear market lasted 349 days (11.5 months). Over this period, the average gain in a bull market was +180.04%, while the average loss in a bear market was -36.34%.

A bull market is generally characterized by a market rise of at least 20% from its previous low. A bear market is defined by a market decline of at least 20% from its prior high.

Choosing a Hypothetical Scenario

The most recent 20-year span, from 2001 to 2021, not only included three bull markets and three bear markets, but it also experienced a number of major black swans with the tech wreck and terrorist attacks in 2001, the financial crisis in 2008, and the COVID-19 pandemic.

Despite these unprecedented events, the S&P 500 still managed to generate a total annual return of 8.06% with reinvested dividends. The total return over this period was 409.13%, which means that a $10,000 investment made at the beginning of 2001 would have been $50,913.05 by the end of 2021.

Taking a different 20-year span that also included three bull markets but only one bear market, the outcome is quite different. In the period from 1987 to 2006, the market suffered a steep crash in October 1987, followed by another severe crash in 2001 to 2002, but it still managed to return an average of 11.24% with dividends reinvested, which is an 8.10% inflation-adjusted return. The total return of $10,000 invested in January 1987 would have been $84,227.27. Likewise, the market roared back following the 2007-2008 financial crisis to the longest bull run on record.

You could repeat that exercise over and over to try to find a hypothetical scenario you expect to play out over the next 20 years, or you could simply apply the broader assumption of an average annual return since the stock market’s inception, which is 6.86% on an inflation-adjusted basis. With that, you could expect your $10,000 investment to grow to $34,000 in 20 years.

Why Is the S&P 500 a Good Long-Term Investment?

The S&P 500 is one of the most widely followed proxies for the U.S. stock market. It's a bellwether and benchmark for many major funds and portfolio managers. From 1950 to 2022, the S&P 500 yielded an annualized average return of 11.19%.

What Is an Inexpensive Way to Invest in the S&P 500?

A cost-effective way to invest in the S&P 500 is through an exchange-traded fund like the SPDR S&P 500 ETF Trust (SPY), which has an expense ratio of 0.0945%.

Is Investing in the S&P 500 Less Risky Than Buying a Single Stock?

Generally, yes. The S&P 500 is considered well-diversified by sector, which means it includes stocks in all major areas, including technology and consumer discretionary—meaning declines in some sectors may be offset by gains in other sectors.

The Bottom Line

You may not be able to predict the performance of the S&P 500 Index for the next 20 years, but you are not alone. In one of his annual letters to shareholders, Warren Buffett included an excerpt from his will that ordered his children’s inheritance to be placed in an S&P 500 Index fund because the “long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, or individuals who employ high-fee managers.”

Options trading entails significant risk and is not appropriate for all investors. Certain complex options strategies carry additional risk. Before trading options, please readCharacteristics and Risks of Standardized Options. Supporting documentation for any claims, if applicable, will be furnished upon request.

There is an Options Regulatory Fee that applies to both option buy and sell transactions. The fee is subject to change. SeeFidelity.com/commissionsfor details.

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Now, let's move on to the information related to the concepts mentioned in the article you provided.

Online Brokers and the S&P 500

The article you shared discusses the best online brokers and the significance of the S&P 500 as a benchmark for investment success. It also explores the use of past performance to predict future outcomes and the reasons why investing in the S&P 500 is considered a good long-term investment.

Best Online Brokers

The article mentions several online brokers and their ratings based on different categories. Here are the brokers mentioned along with their Investopedia ratings, account minimums, and basic fees:

  1. Fidelity Investments:

    • Category: Best Overall, Best for Low Costs, Best for ETFs
    • Investopedia Rating: 4.8
    • Account Minimum: $0
    • Basic Fee: $0 for stock/ETF trades, $0 plus $0.65/contract for options trade
  2. TD Ameritrade:

    • Category: Best for Beginners and Best Mobile App
    • Investopedia Rating: 4.5
    • Account Minimum: $0
    • Basic Fee: $0 for stock/ETF trades, $0 plus $0.65/contract for options trade
  3. Tastyworks:

    • Category: Best for Options
    • Investopedia Rating: 3.9
    • Account Minimum: $0
    • Basic Fee: $0 for stock/ETF trades, $1.00 to open options trades and $0 to close
  4. Interactive Brokers:

    • Category: Best for Advanced Traders and Best for International Trading
    • Investopedia Rating: 4.2
    • Account Minimum: $0
    • Basic Fee: $0 for IBKR Lite, Maximum $0.005 per share for Pro platform or 1% of trade value

The Significance of the S&P 500

The S&P 500 is often used as a yardstick for evaluating investment success. It is a widely followed proxy for the U.S. stock market and serves as a benchmark for many major funds and portfolio managers. From 1950 to 2022, the S&P 500 yielded an annualized average return of 11.19% .

Investing in the S&P 500

Investing in the S&P 500 can be done through an exchange-traded fund (ETF) like the SPDR S&P 500 ETF Trust (SPY). This ETF provides a cost-effective way to invest in the S&P 500, with an expense ratio of 0.0945%.

Risk of Investing in the S&P 500

Compared to buying a single stock, investing in the S&P 500 is generally considered less risky. The S&P 500 is well-diversified by sector, which means it includes stocks in all major areas. This diversification helps offset declines in some sectors with gains in others.

Predicting Future Performance

The article discusses the challenges of predicting stock market returns over a long period of time. It mentions the existence of black swan events, which are catastrophic and unexpected events that can significantly impact the markets. Examples of black swan events include the terrorist attacks on September 11, 2001, the global financial crisis of 2008, and the COVID-19 pandemic.

The article also highlights the importance of considering market cycles within a 20-year span. It mentions that the S&P 500 had three distinct bull markets and three bear markets from 2001 to 2020. The average length of a bull market was approximately 58 months, with an average gain of +180.04%. The average length of a bear market was 11.5 months, with an average loss of -36.34%.

Conclusion

While past performance can provide insights into possible outcomes, it is important to remember that it does not guarantee future performance. The S&P 500 has shown strong historical performance, but it is impossible to predict how it will perform in the next 20 years due to various factors such as black swan events and market cycles. Investing in the S&P 500 can be a good long-term strategy, but it is essential to consider individual financial goals, risk tolerance, and diversification.

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Put $10,000 in the S&P 500 ETF and Wait 20 Years (2024)
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