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Over the past few years, it hasn’t been too difficult to beat the FTSE 100‘s returns. However, the S&P 500 is a different beast and most active fund managers have struggled to match the soaring index.
That need not trouble an everyday investor though, because there’s a simple way to invest in the S&P 500. That’s through a low-cost index tracker like the Vanguard S&P 500 UCITS ETF (LSE: VUAG), which I think is worth considering.
But how much could a 30-year-old investing £150 weekly in the US index make by the time they retire? Let’s find out.
A tech-driven index
The S&P 500 is made up of the 500 leading public companies in the US. While these firms span various industries, a quick look at the top 10 names today shows that this is very much a tech-dominated index.
| Stock | % of funds* |
|---|---|
| Apple | 6.99% |
| Nvidia | 6.59% |
| Microsoft | 6.10% |
| Amazon | 3.76% |
| Meta Platforms | 2.43% |
| Alphabet (Class A shares) | 1.92% |
| Tesla | 1.86% |
| Berkshire Hathaway | 1.71% |
| Alphabet (Class C shares) | 1.59% |
| Broadcom | 1.46% |
This makes sense, of course. We’re living through a powerful technological revolution made possible by many of these companies. In some ways, their platforms have become indispensable tech utilities, without which large parts of the global economy would cease to function.
Over the 10 years to November 2024, the S&P 500 has delivered an average annual total return of 12.7%.
If this run were to continue, a 30-year-old investing £650 a month — the equivalent of £150 a week — and reinvesting their returns in an index tracker fund from today could have a portfolio worth £6,104,465 in 38 years’ time.
This would be a cracking result from pretty modest sums invested regularly. It proves that calling compounding interest a miracle isn’t farfetched!
As mentioned, this figure assumes all dividends are reinvested, and doesn’t count broker-related fees and foreign exchange movements. Inflation over this time would also erode future spending power.
Nevertheless, £6ms would still provide a very comfortable retirement for most people. For example, I’d imagine one could still easily travel the world in luxury with such a sum, even in 2063.
| Year | Balance |
|---|---|
| 5 | £53,702 |
| 10 | £151,339 |
| 15 | £328,853 |
| 20 | £651,593 |
| 25 | £1,238,370 |
| 30 | £2,305,193 |
| 35 | £4,244,791 |
| 38 | £6,104,465 |
Some things to consider
As we know, past performance isn’t necessarily a reliable guide to future returns. In previous decades, the annual return was more like 11%. In this scenario, the balance after 38 years would ‘only’ be £3,888,652.
Plus, there are risks. One is that the S&P 500 is now more concentrated than ever before. The top 10 stocks account for around a third of the total market capitalisation. And less than 30 make up half!
Moreover, due to surging stocks related to the artificial intelligence (AI) mega-trend, the index is now very pricey, historically speaking. The price-to-earnings (P/E) ratio is around 28.
As Apollo Global Management‘s chief economist Torsten Sløk recently noted: “Buying the S&P 500 gives the impression that you are buying 500 different stocks and diversifying your investments. But the reality is that the high and growing concentration in the S&P 500 continues to be a major problem. In short, investors should ensure that their portfolio is not all levered to Nvidia earnings.”
The future
For a 30-year-old investing regularly for retirement, I don’t think Nvidia’s earnings matter too much. In 1987, some 38 years ago, the firm didn’t even exist, along with Tesla, Alphabet’s Google, Meta, and Amazon.
Over the next decades, stocks and industries will come and go. But I expect America and the S&P 500 to keep powering higher.
