If you have ever been or are still attracted by financial news with titles like “Stock Market is going to crash 50% this year” or even worse “The market is yet to see an 80% decline to come” and you read them, you are probably wasting your time. What could be worse is that, if you consistently read these negative opinions, you may train your own psychology to be fearful and myopic by these articles. Some of these articles are written by people who get paid to create eye catching talks/articles for a living.
I will show you why in three simple charts and some explanation.
Chart No.1 shows how much S&P500, as 75% of the current total stock market value, has grown since the 1920s from 7.81 to 3948.71 as close of today (March 23, 2023). If your grand grand grand grandparents happened to be the “unlucky” ones who invested most of their money at the peak of the market in July 1929 (31.32), but they managed their cashflow and risk well so that they did not have to be forced to sell their stocks at a loss during the great recession, the current value with no additional contribution ever after, would be 126 times of the original value as of now in March 2023.
If we assume that they were smart with investment and invested at the maximum pessimism in 1932, the current value of their investment would be 900 times of the initial amount with any additional investment. How many wars, pandemic, regional conflicts, and financial market meltdown have happened since 1920s? More than you can imagine. If you stay invested with S&P500, you can build generational wealth.
Some of you are probably thinking “Hey what’s the point of going back 100 years, I was born in the 80s, 90s, 2000s, and I do not have parents or grandparents who were into stocks and investment.” OK. Let’s look at NASDAQ 100 index’s growth since its inception in 1985 then. From about 128.57 in January 1985, to 12729.23 as of today (March 23, 2023). The index value has increased by 99 times just a bit over 38 years. How many of you would like to have your wealth multiplied by 99 times over the next 38 years without you checking any market news?
Again, what if some of you are just never going to be lucky, so you invested at the previous peak of March 2000, at 4793, but you never panicked and sold your investment, your wealth would still be almost tripled by today.
Why do most traders and retail investors lose money then? Because it takes time and efforts to learn history and strengthen one’s emotional muscles so that we do not panic when majority of people do. There are also the cases when some folks use leverage and did not manage their risk and cashflow well so that they were forced to liquidate the positions and realized the loss, and then either gave up or never had the money to get back to the game again for a long time.
The secret of building wealth with passive investment is consistency and diversification. It is the time in the market that matters, not timing the market, unless you are professional trader who are the top 1% making consistent profit with short-term trading. Dollar cost averaging with fixed contribution periodically into index ETFs are the key to building wealth over horizon of 20 to 40 years. I am going to use one table and one chart from the back test results on PortfolioVisualizer.com to make the point.
In both cases, we assume a person starts to invest U.S. stock market with $10,000 initial investments, and $1,000 contribution per month from January 2000 (To give everyone one or the worst scenarios because January 2000 was just three months before the dot-com crash started to happen.
There are three choices:
1. Invest 100% in S&P500 ETF (VFINX).
2. Invest 100% in Nasdaq 100 index ETF (QQQ).
3. Split between VFINX and QQQ 50/50.
Assuming this person managed his/her cashflow and psychology well and was never forced to liquidate his passive investment portfolio and never listened to the negative financial news that were rampant during three crashes that happened during the past 22 years. What would this person’s investment portfolio be worth by the end of February 2023?
For Choice #1: 100% in S&P500 Index ETF, even with the drawdown from 2022, the portfolio value is $1.2 million.
For Choice #2: 100% in QQQ, the portfolio value is $1.9 million.
For Choice #3: 50% in VFINX, 50% in QQQ, the portfolio value is $1.5 million.
What’s the total investment contribution over the past 22 years?
$10,000 + 22*$12,000 + $2000 = $276,000.
Is it possible to become a millionaire in 20 years with just $10,000 down, and $1,000 contribution every month? You bet. Numbers in the past do not lie. What else is great about this? This person does not need to read any financial news or actively manage this portfolio because everything can be automated in your retirement account or brokerage account.
If you want to understand the financial market, study the history of it.
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