Imagine it's 1994. Bill Clinton is president, Forrest Gump is the top-grossing film of the year, and you have $10,000 to put to work in the stock market.
Here's what happens next.
Where to invest
Now, to keep this scenario realistic, don't imagine that you know the future. Sure, the internet might seem promising, but in 1994, what can be done on the internet is still pretty limited.
So, you call up your stockbroker (no online trading yet) and say you want $10,000 invested in the S&P 500 . Your broker tells you about a new product: exchange-traded funds (ETFs) . State Street has a new one on offer: the SPDR S&P 500 ETF Trust (NYSEMKT: SPY) . You invest the whole $10,000 in it.
How the passage of time affects your investment
Your investment performs exceptionally well in the '90s. By the turn of the century, you've more than tripled your money:
However, that excellent start is about to be tested. From 2001 to 2003, the dot-com bubble bursts, and your investment plummets in value. By the end of 2003, it's worth $27,000. After more than tripling your money in less than six years, you've now lost 20% of that total. You're frustrated with the recent performance, but you carry on:
The market recovers during the next four years; by the start of 2008, your nest egg has recovered all its prior value and then some. It's worth just shy of $40,000:
Then everything goes wrong. The housing market collapses, followed by much of Wall Street, thanks to complex derivative products that seemingly no one understood. In just 15 months, the value of your portfolio crashes to below $20,000 -- the lowest it's been since 1997:
You consider switching strategies, or just withdrawing your money and swearing off the stock market altogether. But, in the end, you decide to stick it out -- more out of resignation than anything else:
And wouldn't you know it, five years later, in 2014 -- twenty years into your journey -- your portfolio is worth $57,000. That's the highest it's ever been. Sure, there are scary headlines from time to time, but the stock market seems to be back on its feet.
You recommit to holding your investment for another 10 years, which brings you right up to the present day:
And wow, are you glad you did. It was during those final 10 years when the real gains arrived -- thanks to the power of compounding. From 2014 through 2024, your portfolio skyrocketed in value from $57,000 to more than $208,000.
How to make it even better
Hopefully, this dream sequence proves something: The stock market, even with all of its ups and downs, remains the most reliable and most effective way to increase wealth over time.
Moreover, there are several ways to boost returns. One is through regular investing, rather than a simple one-time investment. Another is through individual stock investments.
Consider how an additional $10,000 investment in Apple in 2007 (the year the company introduced the iPhone) would have boosted returns. That investment alone would have grown to $877,000 today. Similarly, a modest $5,000 investment in Microsoft in 1995 (the year the company debuted its iconic Windows 95 software) would have grown to $880,000.
The lesson: Even a modest investment in a basic index fund can create a tremendous amount of wealth -- if left to grow on its own. But by investing in individual stocks, and holding for the long term, you can reap rewards that are truly life-changing.
Before you buy stock in SPDR S&P 500 ETF Trust, consider this: