With 20 years to invest, time becomes an investor's greatest ally.
The Vanguard Growth ETF (VUG) is a great choice for long-term buy-and-hold investing.
Even modest investments can turn into substantial amounts of money over time.
The stock market has proven for decades that it can turn even modest investments into substantial sums of money, given enough time and an appropriate rate of return.
The Vanguard Growth ETF (NYSEMKT: VUG) is one of the funds that has done just that, returning an average of 17.9% annually over the past decade.
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It would be unlikely for this fund to deliver that kind of annual return over the next 20 years, but for the sake of argument, let's run the numbers anyway. A $5,000 initial investment that is bought and held for 20 years, earning a 17.9% average annual return, would grow to approximately $134,700. That's an incredibly impressive return, but an unrealistic expectation for the future.
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How about instead we use the Vanguard Growth ETF's since-inception average annual return of 12.1%. That's still well above the S&P 500's long-term 10% annual return, but not entirely out of the realm of possibility. Using the same $5,000 initial investment and 20-year time horizon, we get an ending balance of around $49,100. Not quite as exciting, but still an impressive growth rate.
But let's say the fund simply earns that 10% long-term average return for U.S. equities. In that case, the end result is a balance of approximately $33,600. Not bad for a one-time investment.
The key to achieving any of these returns is investing and staying invested. If you try to time the market and buy and sell along the way, all of these assumptions go out the window. Given that market timing usually does more damage than good to a portfolio, you should assume these ending balance figures get reduced if you start trading along the way.
But 20 years is more than enough time to take advantage of long-term compounding growth. Start with a relatively modest amount, give it time to grow, and your investment could soon turn into serious money.
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David Dierking has no position in any of the stocks mentioned. The Motley Fool has positions in and recommends Vanguard Morningstar Growth ETF. The Motley Fool has a disclosure policy.