Key Points
Over the past 100 years, the S&P 500 has generated an average annual return of around 10%.
With those kinds of returns, even small investments can grow substantially over years.
Here's exactly how much $100 a month could turn into over the next two decades.
A lot of people think it takes a lot of money to make money investing in the stock market. In reality, any investment can do the job. Even small monthly investments made consistently over the course of decades.
For many people, a simple $100 monthly investment in the S&P 500 (SNPINDEX: ^GSPC) is achievable. It may not sound like much, but how large can your investment grow if you keep investing for 20 years?
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Let's do the math.
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What $100 a month in the S&P 500 turns into
Historically, the S&P 500 has generated an average annual return of around 10% over the past century. While returns can fluctuate significantly in the short term, a 10% annual rate of return assumption gives us a good benchmark to work with.
Assuming an investor starts with nothing and consistently contributes $100 a month to something like the Vanguard S&P 500 ETF (NYSEMKT: VOO), at a 10% average annual return, those investments would turn into roughly $76,000.
That means your total of $24,000 in contributions would have generated roughly $52,000 in investment gains. Once the snowball effect of those monthly investments accelerates, the majority of your returns come from compounding, not from the investments themselves.
Consistency matters more than anything
Most people assume that the rate of return you see on your investments is the most important factor in how big your portfolio can become. There's no question it's a major catalyst, but it's not the biggest one.
The ability to consistently contribute to your investment account is perhaps the most important thing for long-term wealth creation.
There will be times when the market declines, occasionally very significantly. But it's the ability to continue investing through those times that could create the biggest benefit. That's because in those situations, you're buying shares at a discount. Taking advantage of those periods could actually improve your long-term returns over pausing your investments when the market gets rougher.
David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard S&P 500 ETF. The Motley Fool has a disclosure policy.