I made this post relatively recently about starting investing right now and realized that it could very easily mislead some people. I made the claim that the market returns about 7% annually on average and felt like I did a disservice without citing any kind of source. So I did what any sensible developer/engineer would do. I created an unnecessarily large spreadsheet to find out whether my statement was true! See what kind of money you’re missing out on if you don’t start investing long term now.
Even after taking word from several articles about the average market performance, I decided that just using a 7% average isn’t enough. I wanted to see what would happen to a portfolio in the real world. My first step was to take the actual annual performance of the S&P 500 Index for the past 90 years (1928-2019). The S&P 500 is essentially a measurement of the value of the top 500 companies in the U.S. based on their share of Market Capitalization. This index is a pretty good indicator for how well the overall U.S. market is doing
Armed with real market performance I reworked the graphs from my previous sheet. In my last post, I had a single 30-year period of investing. I figured I would pick out a random 30-year period in the last 90 years and see how things would look for our fake investor. Source. The first time around I chose 1975-2004, a pretty good period aside from the dot com bubble era.
I was only slightly surprised to find that the results at the end of the 30-year period were extremely similar to that of my original post. The total value was much higher for Person 1 (The one who invested from Year 1) as opposed to Person 2 or Person 3. These were investors who waited 10 and 20 years, respectively, before investing.
The Other Years
It’s great that this 30-year range supports the claim, but there were a whole slew of other ranges in the data set. It’s entirely possible that I just got lucky and selected a range that fit my needs. With this post, I really wanted to ensure that my advice was solid given a number of different ranges. So I set off on generating the investment results of each of the sixty-three 30-year periods from 1928-2019.
As an aside, the effort required to store each of these values was pretty tedious if done completely manually. After the first time around I was content with not needing to re-do the generation. Unfortunately, I realized I wanted to make some changes to my calculations and had to re-generate each value. Not wanting to sit there and manually update once again, I set off on learning to create a macro to complete the task for me. Excel macros are a god-send, I tell you.
Final Portfolios After Each 30-Year Period
- In the Revised post I made an additional assumption about the time spent not investing. I added a pretty generous 1.2% annual return for a fictional bank’s savings account. That’s why the Revised – No Investments section is a good bit higher than the original post’s. I expected this to have a major effect on my results, but was floored finding that things stayed pretty much the same.
- I added this bonus to any funds not currently invested for any of the Fake Investors. For Example: The first 10 years of the funds for Person 2 were spent in a Savings account instead of doing nothing. So as expected, the Revised average would also be higher for these folks as well.
- The Revised average for Person 1 was UNAFFECTED by the Savings Account boost. Since they only invested into the market. To my surprise, the result was that the average ended up a full $200k higher in the end. This correlates to an average annual return of 7.7% as opposed to the original 7% assumption.
- The overall change in values from Person to Person are almost the same between the two posts. Shown below!
Differences from Person-to-Person Per Range
I think the most valuable take away from this is at the top. Here I note the percentage chance that one investor will outperform the investor it’s being compared to. If you’re someone who invested from Year 1 – Person 1 – you have an ~85% chance of outperforming someone who waited 10 years to start – Person 2. Even more amazing is that you have a ~98.5% chance of outperforming someone who waited 20 Years – Person 3! Even better, the average amount you’d outperform Person 3 by is over half a million. If that doesn’t convince you that starting early is the right move, then I don’t know what will. It’s the inherent advantage of compounding that’s on your side the earlier you start!
Investing vs the High Interest Savings Account
Again, the most pertinent thing to take note of is the percentage chance of outperforming at the top. Whether you invested from day 1 or invested 10 years late, someone investing long term would have outperformed the savings account investor. Every. Single. Time. That’s absolutely amazing. Those who fall into camp 3 have an imperfect chance, but their success rate is still amazingly high. I think my favorite metric here is the Average Difference section. This shows that, on average, a day 1 investor would have almost 1 million more than someone who didn’t invest at all. Even starting 10 years later you would hit, on average, $750k more.
So with this I have way more confidence in telling you that investing now is the right move for sure! Nothing feels more satisfying than seeing the numbers back up a simple personal finance move that we can all take advantage of! Investing long term today can net you potentially millions in the future.