Do you know how much the US stock market has returned over the last 100 years?
10.4% per year.
That is an astonishing return for an index.
Most people don’t realise how spectacular it is.
But let me give you an idea.
If you go back 100 years to 1923, the S&P 500 was $8.90.
Today, it’s $4,455.
If you had invested $5,000 in the index in 1923, it would be worth $105 million today.
Now, many of you are probably thinking, “Hah! 100 years! None of us live to 100 so who cares!”
But that is a poverty mindset.
Let me tell you why, in language you will certainly understand.
Imagine your great-grandfather, in 1923, just after surviving World War 1, had a baby and decided to invest $5k into the index in that baby’s name.
That baby, obviously, turned out to be your grandfather.
Now imagine, your grandfather, a hard-working and intelligent man no doubt, was foresighted and didn’t touch that investment. Instead, he simply held onto it as a safety net, and left it for your father to inherit.
And now your father casually says to you, on your 25th birthday, “Here son, this is a brokerage account you’ll be inheriting from your great-grandfather. It’s worth $105 million dollars.“
That conversation might go something like this:
“Wow Dad!!! What did Great Grandpa do to become so rich!! I thought he was just a carpenter!?”
“Yeah, he was. He never earned much at all. But! He invested $5k in the stockmarket in 1923.”
“That’s it? What … did he invest in the greatest company in the world or something?”
“No son, just in a regular index fund.”
“But how did $5k become $105 million? Did you and grandpa have to pull of some crazy stock trades over the years?”
“No, son, we literally had to do nothing. Just leave it alone and watch it grow on its own.”
“Well son, that’s a little thing called compounding.”
Wouldn’t that be nice?
Receiving $105 million, just because?
Creating $105 million in generational wealth for your great-grandkids, by literally doing nothing?
Because it works, and it’s not a secret. That’s exactly what wealthy families have been doing for the last 1,000 years. And that’s why the rich just keep getting richer.
Now, you probably thought that was the good part. But it gets so much better.
Look at this chart:
This shows what $5,000 looks like compounded at 10% over 80 years. Another 20 years of compounding would get you to $100 million, but like we said, nobody lives to 100, so who cares.
So, if you invest $5k into the index on the day your child is born, and never look at it again, they will be worth $10 million when they turn 80.
But it gets better.
Instead of just investing $5k when they’re born, here’s what it would look like if you continued to invest $5k on their birthday each year until they turn 18:
By the time they turn 80, they’ll be worth a whopping $92 million, and in New Zealand, most of those gains will be tax-free (capital gains aren’t taxed).
Here’s the catch: You have to start early.
As soon as your child has a birth certificate, open the account and get the money invested.
This is because time is both your best friend and your biggest enemy, and delaying can literally cost you hundreds of millions.
Here’s a scenario:
Imagine you and a friend of yours both have a kid on exactly the same day.
You start investing $5k per year into the index in your kid’s name, starting on the day she’s born.
Then on her 18th birthday, you stop.
But your friend hasn’t even started. You tell him what you’re doing, and he says, great idea! I’m going to start doing that right now! So on his kid’s 18th birthday he starts, and he keeps investing $5k per year until his kid is 80.
Take a guess – who will end up creating more wealth for their kid?
- You, who invested from the age of 1-18, or;
- Your friend, who invested from the ages of 18-80?
It’s not even close:
Your kid will be worth $92 million.
His kid won’t even be within sniffing distance, at $20 million.
How is it possible that you invested money for 18 years only, and he invested for 62 years (almost 3x longer!) but his kid’s only worth $20m, and your kid is almost worth $100m?
Like I said, with compound interest, time is your best friend and biggest enemy.
Just like your great-grandfather we talked about earlier, who made his investment in 1926, starting as soon as possible is the ultimate hack.
As soon as the snowball starts to avalanche, it’s game over. No matter how hard people work or how much people invest, they can never make up for lost time. The snowball is simply too large, and the compounding effect too strong.
So, how do you apply this to your kids in real life?
As soon as your child is born, invest as much as you can possibly afford into an index fund(s) in their name.
If you have kids and you haven’t done this already, do it today.
Then continue adding to it regularly whenever your finances allow.
And that’s it!
Simply leave it and let it work its magic.
If it were me, I wouldn’t even tell them about it.
I would instead make it my mission to teach them financial literacy, introduce them to blogs like this one, to books like Barefoot Kids and Rich Kid Smart Kid.
Your goal should be that when the day finally comes that they inherit the magical gift of hundreds of millions that you’ve prepared for them, they will be financially wise enough to make a good decision.
Again, you might be thinking, why would it matter if my kid becomes worth $100m at the age of 80? He’ll be dead soon.
But remember – generational wealth is built over generations.
Imagine how life changes for your grandchildren when they receive a will that says they’ve just inherited 92 million dollars.
Remember, life is difficult. Every single day, 99% of the population is ruled by their need for money, their lack of money, their stress about money, their job they hate but they still need to go to every day, for money.
With a simple $5k investment, you can remove that obstacle from your gene pool.
You can create lasting, generational wealth for your family.
You can set your children and grandchildren up so they never have to worry about another medical bill, job redundancy, legal fee or loan payment ever again.
Some people worry about the negative effects of such a windfall, but that’s where you come in.
Instill good habits, knowledge, wisdom and financial intellect into them from a young age. Help them build the mindset that wealth is used to build more wealth, rather than be squandered.
If you’re really worried that they’ll splurge it, put it in a Kiwisaver instead.
That way, you know it’s locked until they’re at least 65.
Just make sure you start.
Not sure where or how? My Start Page has you covered.