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Is the S&P 500 the easiest way to get rich?

I often write on Quora.com, where I am the most viewed writer on financial matters, with over 355.1 million views in recent years.

In the answers below I focused on the following topics and issues:

  • Is the S&P 500 the easiest way to get rich?
  • Is paying somebody 300 pounds a month akin to slavery?
  • How much money are you really losing in the bank?

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Some of the links and videos referred to might only be available on the original answers. 

Source for all answers – Adam Fayed’s Quora page.

Is the S&P 500 the easiest way to get rich?

It is one of the easiest ways to get wealthy slowly and relatively safely, but not “rich” per see.

The performance of the S&P500 has been consistent for decades, at least in terms of the long-term trend, despite the bad periods:

main qimg 8b6a0f2addceda073ec60eeb22496074

That means that if you start investing at a young age, you will get wealthy if past returns are replicated.

That is due to compounded returns as per the quote below:

main qimg 7779aeb8a2e08ada1aea0f1f41bf8f0d lq

The market is also one of the safer ones out there because it isn’t just focused on the US.

Starbucks, Apple et al sell just as much, if not more, internationally than in North America.

Yet if you have $2million at 65, adjusted for today’s money (inflation-adjusted), you are wealthier than most people in the majority of countries.

You aren’t “rich”. You are well-off. That is because you can’t hope to spend say 100–200k a year and the money will last.

Conversely, there are people with super-high incomes and yet they aren’t wealthy as they waste all the money on spending and divorce lawyers, which means they don’t have much of a surplus to invest with to begin with.

People who get wealthy and rich, tend to have at least medium-high incomes AND invest surplus money productively.

We also have to remember something else. Even though the S&P500 has done around 11% per year since 1945, and 10% per year across most 30-year time horizons, most people get far less as per the graph below:

main qimg bc753653671a63ce6ea8eac929e7ef7f lq

The main reason is that many people get scared whenever there is a crash, and want to put in more during the good times.

“Buy high and sell low”, or try to time markets. That is one reason why some firms will only go through advisors.

Dimensional fund advisors, for instance, are low-cost funds that compete with Vanguard.

They made the decision to go through advisors only after looking at research, including from Vanguard, which shows that the average retail investor tends to not buy and hold, and they wanted a more stable situation.

How can an ex-pat millionaire in Dubai pay domestic staff a minimum of £300 a month and say slavery is dead and this isn’t a black thing?

It is a mistake to think about how much somebody is paid. It is better to think about how much somebody can save and invest.

A person who is making 1,500GBP a month in central London will struggle and most likely not save even 1GBP unless they are living at home or have a supportive spouse.

In comparison, a maid in Dubai who gets 300GBP a month + free food and accommodation will be able to send about half of that home, because there are no taxes in Dubai and the costs are mainly covered.

The GDP per capita of the Philipinnes is about $3,500 a year, which is 2,500GBP:

main qimg c20dcd1115da70cc1dcb978246ea4d7a

This means that the maid is able to save and invest more than many people are paid back home.

It isn’t slavery as the person receiving it hasn’t been tricked into it, and feels they are getting a good deal versus the average job in their home country.

What is more, as Dima said below, many locals have maids, as well as expats who aren’t millionaires.

It is a mistake to think things revolve around the norms in your home country.

If somebody was paid 300GBP a month in most developed countries, it would be awful as they might pay a bit of tax, commuting costs, and so on.

It reminds me of people who are amazed that somebody who earns $2,000 a month can take two or three foreign holidays a year in some countries, just because you couldn’t do it in a developed country where the costs are higher.

With inflation upwards of 8% and the interest rates below 4%, am I actually losing money more than making money by keeping my money in banks?

It is worse than that, at least globally.

It seems your answer was written in the money, and finance in India, topic. In India, it might be the case that you are “only” losing 4% per year to inflation.

In the UK, where I am from, banks pay about 0.5%, and inflation was running at 5% last year.

In the United States and some other countries, inflation was running at 7%, with banks paying less than 1%. That is a loss of more than 6% a year to inflation.

What is more, this loss compounds over time

We have all heard about compounded returns which can make people rich slowly and over time, but not compounded losses.

Let’s give a simple example.

Let’s say you have $100,000 in the bank account and you lost 4.5% to inflation in 2021.

That means your money is essentially worth $95,500 in terms of purchasing power parity.

After 3 years, that is $87,098.39, $79,435.91 after 5 years, $63,100.63 in ten years and $39,816.90 after twenty years.

That is why inflation is called the silent killer of wealth. People who have $100,500 in their savings account, from a $100,000 deposit, don’t think about it as a loss.

The huge mistake people make, as the billionaire, Ray Dalio says below, is that people think that cash is at least safer. It isn’t.

Cash is a guaranteed compounded loss to inflation right now and has been since 2008.

Assets like stock markets might be volatile, but 100% of long-term, buy and hold investors haven’t lost money in stocks:

main qimg e6de79d6cfc4ece3b758ae9a67b78a69

If somebody adds government bonds and other assets, the chances of losing money is even lower.

So, you are lowering your risk in return for higher returns, and the only negative is more volatility.

However, once you read about the various countries which have had super-high inflation in the past, such as Germany in the 1920s when money was being moved around in wheelbarrows, Argentina, and even Turkey right now, you realize that cash doesn’t help you sleep at night because there is always the risk that inflation could get worse:

main qimg 5d2db6e789f1caf18f3c335bd40c90d7 lq

The best way to look at this is to imagine a big circle and a dot:

main qimg 5057c4a29dfcb9b70dfafb6f4249bfe2 lq

The dot represents the stock market, and asset, risk. This risk exists in all assets including stocks, bonds, and real estate.

However, this risk can be mitigated by being long-term and diversified – not putting all your eggs in one basket.

In comparison, the circle represents the massive and ever-present risk of inflation, which compounds over time.

People will spend hours, in some cases, negotiating a 5% pay rise, but not half the time looking at better investment opportunities, which makes no sense to me.

Pained by financial indecision? Want to invest with Adam?

Adam is an internationally recognised author on financial matters, with over 760.2 million answer views on Quora.com, a widely sold book on Amazon, and a contributor on Forbes.

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