Introduction:
Assume that an investor in the s&p 500 reinvested for 20 years. What would happen to his portfolio is the topic of this blog post.
Shall we start?
Why S&P 500 is great for the middle class?
All that is great!
Assume that an investor in the s&p 500 reinvested for 20 years:
Consider a scenario were an investor invested $10000 in s&p 500 index fund 20 years back.
Now what would have happen to his investment?
The investors $10000 would have grown to $50,913 dollars at the end of 2 decades.
During those 20 years, there were many unprecedent events occurred in stock market. Such as:-
- Dot com burst
- Terrorist attack
- Housing market bubble
- COVID- 19 Pandemic.
Despite these events, assume that an investor in the s&p 500 reinvested for 20 years, he would have grown his investments by 8.06% per annum.
The total return during this period was over 400%. During these 20 years, the US stock market witnessed several bull markets & bear markets.
Bull Markets:- A bull market is generally considered as a market rise of a more than 20% from its previous low.
Bear Markets:- A bear market is defined by a market crash or decline of at least 20% from its prior high.
Why you should not worry to invest in S&P 500?
When the time of S&P 500 index was created it had a base rate of 100.
During the dot com crash , the index fell from its high of 1478 to 826. That’s more than 55% fall.
Your $100 would have become less than $50 if you had invested in market height.
But the index recovered to its original heights in less than 3 years of time.
Again the index fall more than 40% during the housing market bubble, But recovered quickly from its low.
The s&p 500 stood at 1848 during 2014, even in covid pandemic times the index fell from 3350 to 2500 level.
Again the index bounced back, today its breached more than 4300 level.
In the short term, the index will be influenced by news and mass behavior.
Over the long term, the corporate profits, number & facts will get reflected in the growth of index.
On the chart below if the earnings of s&p 500 you can see,
Arrow 1 – shows the Dot come crash
Arrow 2 – shows the Housing market bubble
Arrow 3 – shows the Covid- 19 crash (Pardon me if you can, for my terrible paint job:)
Lets just think! Was there no crash since 1980’s till 2001 tech burst.
No, 1987 there was Major crash in the history of US stock market, it called as ” Black Monday”.
Can you see the index dip of 1987 in the image? Its looks almost insignificant right.
Over a period of time, even the tech crash, housing market crash, pandemic will look insignificant in the chart at 2050.
What is P/E?
P/E Ratio or Price to Earnings Ratio is the ratio of the current price of a company’s share in relation to its earnings per share (EPS).
Investors can consider earnings from different periods for the calculation of this ratio;
However, the most commonly used variable is the earnings of a company from the last 12 months or one year.
It is also referred to as price multiple of earnings multiple.
S&P 500 P/E?
The current S&P 500 P/E ratio is 23.46.
In last 10 years, average P/E ratio is 31.26.
What is ev/ebitda?
EV – enterprise value. EBITDA – Earnings before interest, taxes, depreciation and amortization.
This ratio is used to compare the companies with in the same industry to value it as good & bad buy.
s&p 500 ev/ebitda?
The s&p 500 ev ebitda form different industries are on the below chart.
Data is available from 2014 to 2022.
Conclusion:
- Investing $10000 before 20 years ago, would be worth over $50,000 today
- Market crashes will become insignificant over a long period of time.
- Post crashes, the markets bound to recover back quickly.
Thank you for reading!
