It’s tough to imagine what your money will be worth over a span of 40-50 years. Obviously any estimate is going to be a speculation, but there are some general concepts that are useful.
The formula for the gain in value of an investment is
FV = (1 + i)ᶰPV
FV = Future value of the investment
PV = Present value of the investment
i = the annual percentage increase in value of the investment
n = the number of years the money is invested
Suppose the annual increase in value of your investment is 3%, and you keep the money invested for 40 years, the future value will be
FV = 3.26PV
Thus a $3,000 investment will be worth
FV = 3.26 x 3000
FV = $9,786
If you compare the same amount of money invested for five years, the result is very revealing
FV = 1.16 x 3000
FV = $3,478
One of the principles for future investing is this: Invest as much as you can early in your career. See the attachments for a comparison of two different investment strategies.
What’s a reasonable increase in value for your investment? This is a hard question to answer because your investment portfolio is likely to experience ups and downs over time. But the broad measure of how stocks have changed in value over the past 60 years is approximately a 7% gain. Since much of your investment will be in stocks, you can probably fund investment vehicles that will give you comparable returns if the future of the stock market performs as it has in the past. Of course specific years, quarters, or moths will see a lot of variation.
There is no guarantee that your investment will grow at a specific rate, but you should see good returns if you follow a strategy with the following elements
- Invest continuously. Don’t let current market performance influence your long term investment approach.
- Maintain a balanced investment approach see the topic: Developing an Investment strategy
- Invest in funds that have a track record of solid performance. Generally this will mean funds that have been around for at least five years. See the topic: Doing Research on Investments.
- Invest as much as you can early in your career. This is where you will get the greatest long term value. You made it through college on minimal funds. If you just continue being frugal for five years, you will have very substantial personal assets when you retire.
- Try to max out your employer’s contribution. Think of this as part of your total compensation package.
- Be patient. Not every quarterly statement is going to show a gain. Don’t make rash judgments about changing the funds you are invested in, especially when the market it down.
Those who have the best long term gains in their personal investments are generally people who followed a prudent stable approach. .