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35 times my money
Posted on February 2, 2024

Every January track what happened to the $2,000 I contributed to my IRA many years ago. I imagine that I put my $2,000 contribution in a gift envelope and bought shares of a stock index fund. It sat there untouched for 35 years, accumulating shares from dividends reinvested; price per share also changed. Patti and I open the envelope each January and see how much is there: we know we can spend it all to ENJOY. This January, it had securities worth $69,800. I made ~35 times my money in dollars. That’s about 14 times my money when measured in real spending power. This post shows the details.

 

== Summary ==

 

I did four things right:

 

 • I saved every year at a much younger age;

 

 • I saved in retirement accounts with no taxes on the growth;

 

 • I invested solely in stocks;

 

 • I invested in each year and stuck with the same fund, equivalent to a very low-cost S&P 500 index fund.

 

Details:

 

I can use Morningstar to see the growth in value for any mutual fund over all the years its existed. Here is the history for the past ten “envelopes” from my $2,000 investments. I invested each in an S&P 500 index fund. My $69,800 this year is about 35 times my original $2,000.

 

 

That’s not really an apples-to-apples comparison. I have to adjust for inflation to find the multiple in real spending power. The inflation factor to apply is ~2.5. $2,000 then has the same spending power as $5,000 now. The multiple in real spending power for our latest envelope was ~14: $69,800/$5,000.

 

== How does this happen? ==

 

That real growth in spending power was from the compounding of the long-term real ~7.1% growth rate for stocks for many years. I like this semi-log graph that shows the cumulative real growth in value for stocks and bonds since 1926. If you start way back in 1926, $1 invested in stocks grew 900X and ~90X that for bonds.

 

 

At 7.1% real growth, I would expect stocks to ~double every ten years applying the Rule of 72: 35 years would be 3½ doublings. Three would be 8x (1 to 2; 2 to 4; 4 to 8) and the five years is half way to the next doubling, getting you to 12X. My multiples have been better than that: for example, a straight line from the start of 1989 to January 2024 is ever so slightly steeper than that 7.1% line.

 

 

Another way to see what happened is to plot the real return multiples from all 35-year sequences of return that started in 1871.  We have the inflation-adjusted monthly returns for stocks and bonds since then. (Data downloads from here.)

 

I plot the multiples of return for the rolling sequences of 35 years. The first sequence started January 1871 and ended December 1895. The second one started in February 1871 and ended January 1996. The last one ended in September 2023. (The data hasn’t been updated yet for the last months of 2023.) That’s a total of 1,441 complete 35-year sequences.

 

 

 

You can see from this that the return multiples of the most recent 35-year sequences are greater than a multiple of 12.

 

You also see the folly of holding bonds for a 35-year period. Bonds do not come CLOSE to stocks for any 35-year period.

 

 

Conclusion. Every January I look back to see what happened to the $2,000 that I contributed to my IRA. I started that in 1981 and contributed the maximum for decades. Each year I look back at the contribution that I made 35 years ago. I can see the growth of my investment – which never changed for 35 years – from the Morningstar site. My investment grew 35X in dollars. My multiple in real spending power was 14X. The multiples of my last ten contributions have been slightly better than one would expect from the long-run real return rate for stocks of ~7.1%.

 

The lesson is to save and invest when you are younger. Save in retirement accounts and benefit from no taxes on growth; invest solely in stocks; never vary from investing and holding a very low cost, broad-based stock index fund.

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