Investing in the Stock Market Could Turn Your $1,000 into $1,800,000: Here’s How



Written by Tony Dong at The Motley Fool Canada

A common question I hear from new Canadian investors is, “How can I invest with just $1,000?” With inflation driving up the cost of living, it’s no wonder most Canadians find it hard to believe that $1,000 is enough to start investing.

The $1,000 is a red herring. Canadian investors should instead focus on their time horizon, that is, the time they have before retirement. It is the most valuable asset most investors have, especially young ones. Time is literally money!

An investor with a long-term horizon (say, 40 years to retirement) can turn even modest sums into a multi-million dollar retirement nest egg. You do not believe me ? Let’s look at a historical example below using low cost index exchange traded funds or ETFs.

How to invest with $1000

What to invest it in with only $1,000? Of course, you can try picking individual stocks (and my fellow insane writers have some fantastic suggestions). Still, trying to buy enough stocks with just $1,000 and stay diversified is very difficult. The solution here is an index ETF.

Index ETFs track a basket of stocks according to predefined rules. A popular option here are broad index ETFs, which track well-known stock indices like the S&P 500. Broad index ETFs offer the highest degree of diversification and tend to have the lowest costs.

A preferred general index ETF is Vanguard U.S. Total Market ETF (TSX:VUN). This ETF tracks the CRSP US Total Market Index, which contains over 4,000 stocks. It’s a great way to invest passively for the long term because you’re betting on the entire US economy instead of just a few select companies.

The results

Suppose the year is 1982 and you are 20 years old. You only have $1,000 to invest, but you can afford to contribute $200 a month. That equates to $2,400 a year in contributions, well below the annual Tax-Free Savings Account (TFSA) threshold of $6,500 in 2022.

You invest it all in the entire US stock market using the cheapest broad index ETF you can find on the market. You never panic sell, weather numerous stock market crashes and bear markets, and always pay your monthly amounts on time.

The result? 40 years later, in 2022, your humble initial contribution of $1,000 and your monthly deposits of $200 would have grown to over $1.8 million. If you had invested more initially or increased your monthly contributions, the final amount would have been even higher.

The key to success here is to stay diversified, practice good investing behaviors (no panic selling, timing the market, etc.), keep fees low, and maintain a long-term perspective. With this mindset, newbie investors with modest portfolios can experience great success.

The post Investing in the stock market could turn your $1,000 into $1,800,000: Here’s how first appeared on The Motley Fool Canada.

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Contributor jerk Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in the stocks mentioned. The Motley Fool has a disclosure policy.



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