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When it comes to stock market indexes, most UK investors tend to focus on the FTSE 100. That’s understandable, as the Footsie is the UK’s main index and it contains many well-known companies.
However, there’s an index that has significantly outperformed the FTSE 100 over the long term. If I’d put £12.5k into this index 40 years ago, my investment would now be worth about £1m.
A powerhouse of an index
The one I’m talking about is the S&P 500 – the US’s main stock market index. A powerhouse of an index, it’s home to some of the most dominant companies in the world, including the likes of Apple, Amazon, Tesla, and Nvidia.
It’s quite easy to find historical performance data on the S&P 500. And this can provide some really interesting insights.
Playing around with a historical return calculator last week, I calculated that if I’d invested £12.5k in the index in November 1983, that money would be worth around £1m today when dividends are included (this factors in GBP/USD exchange rates).
The small print
Now, there are a few issues to point out with this calculation. Firstly, £12.5k 40 years ago was a lot more money than it is today. Adjusted for inflation, it’s probably equivalent to around £40k in today’s money.
Secondly, 40 years ago, it probably wasn’t possible to get direct exposure to the S&P 500 index as a UK investor.
Index funds were in existence in the US at the time, however, they weren’t a mainstream investment here in the UK.
Third, the calculation doesn’t factor in taxes, fees, or transaction costs. Finally, 40 years ago, I was only four years old. And a four-year old me wasn’t looking to invest £12.5k.
Still, it’s a pretty amazing calculation, to my mind.
By comparison, a £12.5k investment in the FTSE 100 index when it launched a few months later (in January 1984) would have grown to around £220,000 today.
The power of the stock market
As for the takeaways here, there are several. These calculations show the benefit of diversifying a portfolio internationally. And more specifically, allocating some capital to US stocks.
The US has a long history of innovation and entrepreneurship. This entrepreneurial spirit has led to the creation of some of the world’s most successful companies, which, in turn, has led to huge returns for investors.
Meanwhile, the calculations also show the power of long-term stock market investing. Over the long run, the S&P 500 index has generated a return of around 10% a year.
That doesn’t sound like that much. Yet, over a period of 40 years, 10% a year can turn even a little amount of money into an enormous sum due the power of compounding (earning returns on previous returns).
Lastly, they show that the stock market can be a great vehicle for building wealth for future generations. By investing on behalf of our children when they are young, we can potentially set them up for life.
