2 min read
If you have a dollar in your pocket and buy something with it, that dollar is gone forever. It has a value of $0 to you.
If instead you choose to invest that dollar in the stock market, you’re technically putting it “at risk”, meaning it could increase or decrease in value over the short-term. This means it’s difficult to predict what that dollar will be worth in one week, one month, or even one year from now.
Since we know that historical stock market returns can’t predict future returns, it’s nearly impossible to predict how the S&P 500 will perform in any given year.
For reference, let’s take a look at the past 20 years of S&P 500 returns:
Notice how the S&P 500 has a positive return in most years, but occasionally it does have negative years.
Consider this thought experiment: It’s January 1st and you have two options:
(1) Buy [insert random item here] for $1.
(2) Invest $1 in an S&P 500 index fund.
With option (1), for 20 out of the past 20 years that dollar would be worth $0 by the end of the year.
With option (2), for 16 of the past 20 years, that dollar would have been worth more by the end of the year. In fact, in the best year (2013) your dollar would have increased in value to $1.32 (not including dividends).
But even during the worst year in option (2), where your dollar dropped in value to 64 cents, that’s still 64 cents more than if you had chosen option (1).
This brings up an important point: A dollar that experiences an investment loss will always be worth more than a dollar spent on something you don’t need.
The good news is that over longer time horizons, your invested dollar is virtually guaranteed to increase in value. Check out this chart I used in an earlier post that shows the growth of $100k invested in the S&P 500 during all 20-year periods since 1928. Each blue line represents a distinct 20-year period.
During the worst 20-year stretch (1929 – 1948), your $100k increased in value to $115k, even after adjusting for inflation. During the best stretch (1980 – 1999), your $100k grew to over $1 million.
This means that during any year you could have invested one dollar, taken a nap for 20 years, and woken up to find that your dollar was worth more than just 100 cents.
I try not to laugh when I hear someone say “investing in the stock market is risky.” You know what’s even riskier? Choosing to spend all of your income. That comes with a guaranteed loss of capital.
Zach is the author behind Four Pillar Freedom, a blog that teaches you how to build wealth and gain freedom in life.
Zach's favorite free financial tool he's been using since 2015 to manage his net worth is Personal Capital. Each month he uses their free Investment Checkup tool and Retirement Planner to track his investments and ensure that he's on the fast track to financial freedom.
Although the bulk of his net worth is invested in index funds, his favorite place to invest in individual stocks is M1 Finance, a site that allows you to build a custom portfolio of stocks for free.
His favorite way to save money each month on his recurring bills is by using Trim, a free financial app that negotiates lower cable, internet, and phone bills with any provider on your behalf.
His favorite place to find new personal finance articles to read is Collecting Wisdom, a site that collects the best personal finance articles floating around the web on a daily basis.
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