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Invest in Standard & Poor's 500 It has provided exceptional returns for long-term investors. Even in the past five years, enormous amounts of wealth have been created, thanks in large part to the “Big Seven” stocks.
In fact, anyone who put £1,000 to work in a passive index tracker five years ago would have now doubled their money by around £2,085. And for stock pickers who invest exclusively NvidiaYour initial £1,000 is worth £13,407 today!
Naturally, the question now becomes: Can the largest US stocks continue to achieve such massive gains in the future? And how much money can a 50-year-old investor expect to make before retirement hits age 67?
Set realistic expectations
The 108% total return of the S&P 500 over the past five years is quite exceptional. This ultimately translates into an average annual return of 15.8% per year compared to the typical return of the US stock market (10%).
Is this likely to continue? Unfortunately, probably not.
The past five years have been highly unusual, with the US economy receiving unprecedented stimulus in 2020, a rapid post-pandemic recovery in 2021, and continued outperformance from tech giants like Nvidia in the years since.
Such events are very rare. Although we have seen periods of massive outperformance of the S&P 500 in the past, these periods were always followed by an eventual retracement to the longer-term average of 10%.
| It happened | Boom years | The average annual return of the S&P 500 for 5 years | recession years | Market decline |
| Dot-com bubble | 1995 – 2000 | 22% | 2000 – 2002 | 40% |
| Financial crisis | 2003 – 2007 | 14% | 2008 – 2009 | 57% |
| Post-pandemic boom | 2020 – 2025 | 16% | Time will tell | Time will tell |
The good news is that 10% is more than enough to build amazing retirement wealth even when starting from scratch at age 50 with just £500 saved per month. By allowing the compound to work its magic for 17 continuous years, a brand new wallet could be worth up to £266,132.
Maximize wealth
Having an extra quarter million for retirement certainly helps. But for successful stock pickers, even more wealth can be unlocked. Even if the portfolio only generates an extra 3% above average, that's enough to add nearly another £100,000 to the pension fund.
There is no guarantee with investment. But one S&P 500 company that I recently added to my portfolio is Toast (NYSE: TOAST).
The cloud-based restaurant management platform now powers 156,000 locations across the United States, enabling restaurant owners to handle payment processing, ordering, delivery, employee payroll, and even capital financing.
By offering quick and easy solutions to almost all the problems restaurant owners face, adoption of these solutions is accelerating, translating into exponential growth in revenue and profits. Of course, there are still risks.
Toast isn't the only technology solution for restaurants, which limits subscription pricing power and transaction acceptance rates. The latter represents a much bigger hurdle since the bulk of its cash flow comes from charging a small fee on each transaction that moves through its platform. It also makes businesses more sensitive to economic downturns since consumers are less likely to eat out when trying to reduce discretionary spending.
However, I remain optimistic in the long term. There are more than 700,000 restaurants in the United States alone. While Toast already controls the lion's share of the market share, its growth potential remains significant, especially when it accelerates its international expansion. That's why I think growth investors might want to take a closer look.
