We all invest for different reasons. For some, it’s a game to win, for others, it’s about the freedom to choose. To choose whatever you like, and to hell with the cost.
The wonderful law of compounding means you can invest thoughtfully today, and end up being quite wealthy later on. Why this works is a great question to ask, but in this article, let’s explore what compounding can do.
What does $10k invested in the S&P 500 turn into over the next 20 years?
Let’s say you invest $10k exclusively in an S&P500 index fund (500 investments, in one go). Here’s what you get:
$61,917.64
This is the fun part though…
What does $10k invested in Bitcoin turn into over the next 20 years?
$8,755,731.48.
Right about now I should mention ‘this is not financial advice’ and ‘past performance is not the same as future performance’ and ‘do your own research’ and ‘investing in markets can be volatile, and in some cases, you will lose money’.
That said, check out the score card.
If you invested $10k, plus $1k per month for 20 years, what would you get?
100% S&P500 = $1,326,673.56.
100% Bitcoin = $1,073,741,824.43.
‘I’m okay with the first one but that second one, now way!’, right? I hear you. Consider this ‘SPITCOIN’ portfolio as an idea: 95% of the S&P500 and 5% of Bitcoin.
95% of your portfolio is going to generate the rate of return usual for the S&P500 and in a worst case scenario, your bitcoin goes to $0. Over a 20 year period the different shouldn’t be felt.
If bitcoin continues to grow even at a ‘conservative’ rate of return though:
$54,947,426.61.
All forms of investing carry risk, including the risk that you don’t understand some aspect of what you’re doing. Please do your own research before investing in anything discussed here.
Assumptions
As it relates to the ‘rate of return’ or compounding annual growth rate (CAGR) calculator, please note the following assumptions have been made.
The inflation-adjusted return used for the S&P500 was 9.55%
The inflation-adjusted rate of return for Bitcoin was 25%
The S&P500 would be a good proxy for any diversified investment fund. It will resemble the rate of return possible the more diversification you employ in your own portfolio. Note that rates of return for individual share portfolios with fewer than 500 securities can have higher variability in return.
The Compound Annual Growth Rate (CAGR) of the S&P500 is measured over a 15-year period, and over a 10-year period:
For the period from 2009 to 2024 (15 years):
Initial Value (2009): 676.53 Final Value (2024): 5005.57
For the period from 2014 to 2024 (10 years):
Initial Value (2014): 2058.90 Final Value (2024): 5005.57
The idea is to ‘blend out’ some of the effects of the pandemic period, where governments and central banks injected phenomenal levels of liquidity into the markets.
After performing the calculations, the Compound Annual Growth Rates (CAGR) for the S&P 500 are approximately:
From 2009 to 2024: 15.7% From 2014 to 2024: 9.4%
Average CAGR=((15.7+9.4) /2) – 3% (inflation rate)= 9.55%
Bitcoin was worth $0.00099 in 2009, and assuming the price today is $52k, the rate of return since inception would be 370%. Over 2014 to 2024 the CAGR was 40%.
Let’s consider the Compound Annual Growth Rates (CAGR) we calculated for Bitcoin over two different timeframes:
From 2009 to 2024, the CAGR was approximately 370.4%. From 2014 to 2024, the CAGR was approximately 39.7%.
These two rates represent the average annual growth over 15 years and 10 years, respectively. The underlying assumption and justification for conservative tilt, is that CAGR is slowing down as the network adoption kicks in. This may be overly conservative but given the absurd results obtained even at 40%, this is more a move out of credibility.
When choosing a conservative CAGR for future projections, it’s important to consider several factors:
