John Waggoner recently wrote a funny article in USA Today from the perspective of a perturbed Santa Claus begging the nation to save more money. The conceit of the article, that Santa is responsible for the hot stock market of the past five years, made me giggle. But it’s actually an instructive view to take of the stock market. As young children, we believe that Santa can visit every house in one night without needing to work out the logistics in our head. Likewise, we don’t need to understand the mysterious workings of the stock market to take part in its wealth creation.
To wit, an info-graphic accompanying the print edition of Waggoner’s article shows the performance of some popular mutual funds over the past five and ten years. The graphic assumes a modest $100 dollar monthly investment in each fund (less than $25 per week). I’ve condensed the information and transcribed the results below for the top five funds.
Value of $100 Invested Monthly
Vanguard Total Stock Market Index Fund
SPDR S&P 500 ETF
Vanguard 500 Index Fund
American Funds Growth Fund of America A
American Funds EuroPacific Growth Fund A
The top fund, Vanguard Total Stock Market Index Fund, returned 81% on top of an initial $12,000 investment. It’s important to note that this isn’t a fund that hit it big by betting on a hot sector of the market. It’s not an exclusive hedge fund. The VTSMIF owns a diverse mix of assets, like the Cliff’s Notes version of the US Stock market. Its holdings and methods are open for anyone to see.
Anyone with $3,000 can sign up for this fund. And for the pleasure of its 81% return, Vanguard charges an expense ratio of .05% on accounts over $10,000 in value. This works out to $10.85 per year on that final value of $21,701, about the cost of the breakfast I have in front of me as I type this. This is so insanely low that I had to rerun the math three times to make sure it was correct. It is.
What can we learn from this? I hope that it puts a hop in the step of anyone currently investing their money, and a boot in the behind of anyone who isn’t. For most people, twenty-five dollars per week doesn’t hurt, and yet it can become over twenty thousand. You can run your own calculations to see how well this scales up (hint: $200/month equals $43,440 after ten years!).
And it shows that this process of wealth accumulation is dead stupid. The person investing $100 per month in these mutual funds could have theoretically set up the machinery in a single day and never touched it again. There was no day trading or intense research necessary. He or she simply bought a single fund, and once the automatic contributions began, they didn’t stop.
You can start to see that, though the stock market has and will continue to seesaw up and down in the short term, the best time to start investing is now. And all this can be achieved without getting ripped off in the process. It almost seems too good to be true. But, unlike Santa Claus, it is.