Ever wondered how to make $1 million in one hour? Or to be more precise, with one hour’s effort? I’ll show you at the end of this post.
I’m not sure about you, but I find those 20/20 hindsight moan-alogues like “if only I’d bought Google shares at $50 back in 2004” singularly unhelpful.
My view? Either invent the time machine or just shut up.
If you invented the time machine there are much better uses for it than riding a rising stock!
History repeats, so listen to what it tells you
That said, history has a tendency to repeat, so there are some past patterns that are worth paying attention to.
Woulda/Coulda/Shoulda #1: If you’d invested USD$1 in a S&P500 index tracker in 1988 on “set and forget” basis, at the end of 2017 you would have an inflation-adjusted investment worth USD$4.76, a return of 476% over roughly 30 years.
Conclusion: Over the long term stock markets have tended to go up. However nothing is guaranteed, so Newton’s “what goes up must come down” experience with apples may hold true over the even longer term. Economists have the final say: “in the long run we are all dead“.
“in the long run we are all dead“
Woulda/Coulda/Shoulda #2: If you’d invested that same USD$1, and reinvested the dividends, then you would have an inflation adjusted USD$9.28 at the end of 2017, a return of 928% over roughly 30 years.
Conclusion: Opportunity cost is brutal and unforgiving. Money spent is gone forever. Money invested could attain an infinitely renewable flow of funds.
“Opportunity cost is brutal and unforgiving“
Woulda/Coulda/Shoulda #3: When it comes to longer-term returns, compounding dividend reinvestment has accounted more than half the total investment return over the last 30 years.
Conclusion: To paraphrase something Albert Einstein apparently never actually said: “compounding is the most powerful force in the universe”.
Pretty charts, but so what?
We’ve all seen these sort of charts before, and for most of us it hasn’t changed out behaviour one iota.
Now Iets bring it to life.
Some remarkable things occurred in the 1980s. Tim Berners-Lee invented the internet. Motorola released the first mobile phone. A generation of self-taught programmers cut their teeth on the Commodore 64 computer.
The basic idea behind an Individual Savings Account (ISA) is you invest after-tax savings up to an annual limit. Any subsequent income or capital gains earned are entirely tax-free. The money is available whenever you want it. There is no age restriction or pension/superannuation style lock-in.
American readers, this is the equivalent of a Roth IRA without the age restrictions. Canadian readers, this is the equivalent of a Tax-Free Savings Account. Australian and New Zealand readers… in this case it sucks to be you, write to your local electoral representative asking them to implement a tax-free savings/investment account.
To illustrate how powerful an ISA can be, consider the chart below. It demonstrates the inflation adjusted results if an investor had fully utilised their annual ISA contribution limits over the past 30 years to invest in the S&P500 index, on the first day of each tax year, at the prevailing Bank of England spot rate, and reinvested all dividends.
Woulda/Coulda/Shoulda #4: Fully utilising the annual contribution limits available to every taxpayer potentially achieves remarkable results, such as a portfolio worth nearly USD$5 million (over GBP£3,600,00) at the end of December 2017.
Conclusion: Governments encourage the usage of legally tax-free savings accounts that, when used effectively, are more than capable of making an investor rich (enough) by most definitions of the word.
In the real world there would have been some brokerage, management and platform fees incurred. These would have created a drag on returns, however the point is that comparable results are achievable with minimal effort.
How to make $1 million in one hour
At the start of this story I promised to tell you how to make $1 million in one hour. The answer is at the start of each tax year fully fund your tax-advantaged savings account, and instruct your broker to invest the balance in a low-cost index tracker fund.
It will take you no more than 5 minutes per year, but from a financial perspective, it will probably be the best 5 minutes you spend all year.
After 12 years (1 hour / 5 minutes = 12) your investment will have compounded, potentially providing you entry to the “two comma club”.
- As always, “trust, but verify”, your mileage may vary.
- If a tax-free savings account is available in your jurisdiction, make use of it!
- If you liked this post then please share it with your friends.