Everyone should passively invest at least some money in the stock market. Over time, it is like a saving account on steroids. And who doesn’t want a jacked investment account!?
Passive investing means doing almost nothing…just collect profits. And it turns out, over the last century, this has been a fruitful strategy. Invest capital. That’s it. No selling positions or analysis of where the stock is going to go next. Just invest and hold.
The average yearly return for the S&P 500 index, which is a benchmark for how the US stock market performs, is 10.3% over the last 100 years (<–read this, also, to get a sense of how the stock market moves over time).
The Nasdaq 100 index yearly returns have averaged 14.3% over the last 20 years.
In terms of compounding, if we invest and make 10%, the next year we’re making returns on the initial investment plus the profit.
Year after year the account grows because returns are being made on a larger and larger amount of money.
Investing $300 per month turns into $637K over 30 years…compared to $146K making 1% in a bank account (or about $108K saving it in under the mattress).
You could of course contribute more or less. And if you can start out with a bigger chunk to invest to get the ball rolling, all the better for the future nest egg.
You can see how different investment amounts, contributions, and average returns (%) compound over time using the Investor.gov compound calculator.
To capture that 10.3% per year, we need to invest in something that mimics the S&P 500. Enter Exchange Traded Funds or ETFs.
Using ETFs to Compound Returns Through Passive Investing
An ETF trades like a stock; it can be bought and sold anytime the stock market is open (930 am to 4 pm EST). You can place an order to buy at any time of day, but the order will execute during the above hours.
The ETF tracks an index, such as the S&P 500, which has a long history of (10.3%/year) upward growth.
Why is this? The index is actually a strategy. The index only includes the top 500 companies in the US based on defined metrics. If a company stops performing as well, it is dropped and a better company is added. The index is the top companies in the US in any given year. Good companies tend to grow and increase profits, which increases the stocks’ share prices. The index is doing the work for you, only tracking the top companies and avoiding the rubbish.
Which S&P 500 ETF to buy (depending on if you’re in the US or Canada), along with other solid ETFs to consider, including ones with higher average returns, are revealed in my Passive Stock Investing ETFs eBook.
There are thousands of ETFs, and they’re not all equal. Some don’t track the index very well, and others have high fees which erode profits. The eBook lays out which other ETFs to buy for Americans and Canadians, how to allocate funds to them, and how to research ETFs yourself.
Real quick though, I put a chunk of my capital in an S&P 500 ETF, a chunk in a technology ETF, and then smaller chunks in cryptocurrency ETFs, and international ETFs (tracking India, China, and/or Canada).
When To Passively Investing and Buy
Purchase an ETF at regular intervals, such as monthly or quarterly. Just buy, don’t try to “time” an ideal time to purchase it.
For passive investing, get the money working as quickly as possible, which is when that money is available to invest. If you pay commissions on each transaction, save up your capital so that the commission is a tiny fraction of your purchase price.
Many brokers in the US are commission-free, and many brokers offer commission-free ETF trading.
National Bank Financial and Interactive Brokers are free and cheap (respectively) brokers in Canada.
Consider whether you want to invest in a tax-protected account (tax advantage now, or don’t pay taxes on gains) or a normal trading account (taxed on gains).
Start Now! Any additional Years Can Mean Big Compounding Returns
If you do nothing else for your future, start passively investing at least a bit of capital each year. Don’t concern yourself with the ups and downs in the stock market, just stick to the plan of regularly contributing.
If you have kids, start them early.
Every $300 investment now is almost $6000 in 30 years.
Guess how much one (no additional contributions) $300 dollar investment is in 60 years? More than $110,000! It pays to start as early as possible.
The stock market does have ups and downs, but over 10, 20, or 30+ years, it is definitely worth doing. My only regret is not starting sooner.
I’m a trader, and I initially turned my nose up at making 10% per year. I make higher returns day trading and swing trading…but then I just spent the profits.
I wish I would have passively invested some of my income/profits in my teens and in my 20s. I didn’t start passively investing till my 30s. Better late than never. Early on I failed to realize that passive investing takes very little work, and the returns can get very big the longer the money is invested.
Investing for 10 years is better than 5. Investing for 20 years is better than 10. You get the point.
The chart above shows that investing $300 per month turns into $637K in 30 years. But if you start earlier, over 40 years you have almost $1.8 million. Any extra years make a big difference! $1.8 million for basically doing nothing, except saving a bit each month (and investing it) which we all should be doing anyway.
Start early. Invest regularly. Stick to the plan.
If you want more guidance on this, I laid it all out in a quick read Passive Investing ebook so you can start investing and start compounding your money today.
By Cory Mitchell, CMT
Disclaimer: Nothing in this article is personal investment advice, or advice to buy or sell anything. Trading is risky and can result in substantial losses, even more than deposited if using leverage.