The Peter Lynch Investor » Newsletter » Essentially there's two roads to take with investing.
Woman at the beach between two paths

Essentially there’s two roads to take with investing.

Apr 22, 2023   Category: Advice, Compounding, Education

I’ve been investing for myself for awhile and one thing I’ve learned is that there’s essentially two paths you can take.

The first path is pretty easy.

All you have to do is put a percentage of the money you make into an investment account. Every time you add money buy the Vanguard S&P 500 ETF. It’s an index fund that buys all the companies in the S&P 500. Keep doing that for 30 years. You’ll end up with a decent amount of cash. How much depends on your individual circumstance.

How much will you make taking the first path?

Find out by going to the SEC’s compound interest calculator. You can use the example below as a guide. Change the numbers to whatever works for you. The only number you can’t change is the 9.82%. Why? Because that’s the average annual return of the S&P 500 over the last 100 years.

compound interest calculator

This is an easy way to invest for yourself. Outside of the 30 years needed to compound your cash, it doesn’t take a lot of your time. It doesn’t require a financial advisor and the fees they charge. The only costs will be taxes (if it’s not in a tax-sheltered account). The modest fee Vanguard charges for the ETF. The fees from every time you buy the ETF.

The second path is a little more challenging.

In addition to the time it takes to compound your cash, it takes time studying. You’ll spend time studying books on investing. Studying individual companies. Studying financial statements. Studying other investors. Studying just about everything.

Again, your particular circumstance will dictate how much time you spend studying. However, make no mistake… time is required.

The result of taking the second path is that you either find your fortune faster or you grow your fortune larger. Hypothetically, this path will give you an annual rate of return that surpasses the 9.82% you’ll get from the S&P 500.

Assuming the numbers are the same as the example above, a 12% interest rate would mean you’d get to $500,000 in 26 years instead of 30 or you’d end up with $873,797.66. Up the rate to 15% and you’d get to $500,000 in 22 years or end up with $1,635,294.30.

Whichever path you take in investing, it will be rewarding.

That’s the one thing that both paths have in common. And, I should say that there’s no reason why you couldn’t find some kind of blend between the two.

I’m on second path now but I might change later on. The idea of spending my time studying the surf on Maui’s north shore sounds considerably more appealing than the 2023 annual report for Waste Management Inc. Weird… I know.