The 40/40 millionaire

Piggy Banks

From birthday cash when we’re kids to our paychecks when we’re adults, we’ve constantly been told to save. We’re told by our family, friends and bank adverts on TV that saving money for a rainy day is always the way to go. While it may seem like a simple task, we’ve all been told there’s only one option (There isn’t!).

The simplest way we think of saving is keeping the money as cash somewhere safe or in a bank account untouched. Let’s say you saved $40 a week for 40 years (40/40). In 2061, you’d have $83,200 at hand… the equivalent buying power of having $30,986 today [1](Assuming 2.5% annual inflation). This figure is really disappointing for 40 years of saving!

Of course you could put this money in an interest paying bank account but the rates are usually less than inflation so you’ll still be losing value. Even if the bank matched inflation, $83k for 40 years of saving still doesn’t seem worth it. This is where I introduce the beautiful invention of the index fund…

The Index Fund

You may think investing in the stock market seems terrifying and risky with all that volatility, and you’d be right. However, the stock market as a whole has done incredibly well since it’s inception and in the long term (like 40 years) performs quite positively. For example, the US’ S&P500 index, a collection of the largest stocks in the USA (roughly 500 of them!), has had an average annual return of around 10–11%! [2]

This means that if the US continues being the US and the stock market continues like it has since 1926[3] and we assume an average 10% annual return, $40 a week becomes $1,012,651.77 after 40 years![4] I don’t know about you but that sounds way better than just $83k.

By investing every month/6 months/year in the S&P500 for 40 years you minimize so many risks, the main advantages are:

• Investing in 500 of the largest stocks means all your eggs aren’t in one basket, some stocks will do bad but will be countered by those that do well. All these returns average to around +10% a year.
• Investing the same amount periodically over a long period of time averages your buy price so that over time your average return also matches the 10% a year.
• You’re not trading the stocks (buying and selling in short period of times) so you don’t have to worry about the short term volatility which causes so many people to lose money

Risks

The Index fund passive investment strategy (as described above) is the safest way to invest in the stock market, however it still does have it’s risks. Some are caused by our own emotions, like not following the periodic strategy because the market is looking worrying — every stock market crash has been followed by a raging bull market and selling at the scariest time is what causes people to take a loss and miss out on the best days afterwards.

Constricting yourself to just the US economy can also be risky. Japan’s stock index, the NIKKEI 225, still hasn’t recovered from it’s 1989 high [5]. What’s to say that this can’t happen to the US stock market?

For these reasons, I suggest that anyone interested in this strategy should do a lot of their own research on index fund investing before starting. I recommend reading the following three books for those that are interested in improving their financial education:

• The Little Book of Common Sense Investing by John C. Bogle
• Unshakeable by Tony Robbins and Peter Mallouk
• The Intelligent Investor by Benjamin Graham

Final Thoughts and Disclaimer

This isn’t the only to save or invest; adding other assets like government backed bonds into your portfolio also aids in diversification. Some investors will prefer to keep a portion of their money in the bank and that’s fine too. The point of this story was to introduce people to concepts they may not have learnt about before. What you do with your savings and investments is up to you, everyone has their own unique needs and wants and should plan their saving accordingly.

This story was written to show that there are options other than saving your money in a bank to save for your future. Past performance is not indicative of future results. This story is not an instructive guide, but rather a thought for those who wish to carry out their own research on the matter. I am not a financial advisor, and this is not financial advice.

1. Inflation calculator used <https://smartasset.com/investing/inflation-calculator#xTQIyrV44f>
2. Investopedia, 2020 <https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp>
3. The S&P500 started as the “composite Index” in 1926 <https://www.investopedia.com/ask/answers/042415/what-average-annual-return-sp-500.asp>
4. Formula used : FV = P × ((1 + i)ⁿ— 1) / i) × (1 + i) , where FV=Future value, P=periodic investment amount ($2080 in this case since $40 is $2080 a year), i=rate of return (10% so 0.1), and n=number of years(40)