If a 50-year-old puts £500 a month into the S&P 500, here’s what they could have by retirement
The S&P 500‘s long delivered exceptional returns for investors. And in recent years, thanks to artificial intelligence (AI) fuelling stellar growth among its largest constituents, the index has been significantly outpacing its historical average return.
In the last five years, passive index fund investors have earned a 110% return. That’s a 16% annualised gain versus the usual 10% investors have come to expect. Those are some pretty phenomenal gains. And it’s more than enough for a 50-year-old who’s just started saving for retirement to build a sizable nest egg.
Estimating retirement wealth
Let’s assume an investor has just turned 50. They intend to retire at the age of 67, and through no fault of their own, they currently don’t have any retirement savings. With £500 to spare each month, they decide to drip feed their money into an S&P 500 index fund. So how much money can they expect to have 17 years from now?
If the S&P 500 continues to outperform at 16%, a portfolio could reach as high as £521,600. That’s a pretty nice chunk of change. But if the index reverts back to its usual long-term trajectory, this pile could shrink to £266,100.
In practice, the latter seems more likely. Maintaining a 16% annualised gain is a pretty challenging task. And with most of the recent growth driven by cyclical spending, it’s likely prudent to take a more conservative view. Still, having just over a quarter of a million pounds in the bank is nothing to scoff at.
But what if we really want to keep that 16% gain? There are never any guarantees when it comes to investing. But when executed intelligently, stock picking can deliver such gains.
Moving beyond index funds
Stock picking‘s inherently more risky than relying on index funds. Apart from having to spend a lot of time analysing companies to discover which ones are duds, missing out on opportunities can result in substantial opportunity costs. And that can leave a custom portfolio to lag indices like the S&P 500.
Yet, for prudent and dedicated investors who discover the right opportunities, the rewards can be enormous. Take Intuitive Surgical (NASDAQ:ISRG) as a prime example. The healthcare technology company is the global leader in robot-assisted surgeries, operating with a highly profitable razor-and-blade business model.
By offering its machines at a low margin to hospitals and then selling consumable components like scalpels at a high margin, the firm has become highly cash generative. And over the last 17 years, that’s translated into an average annualised return of 18.6% — enough to build a £711,350 retirement portfolio.
Taking a step back
Not every individual S&P 500 stock has outperformed, with plenty of promising enterprises failing to meet expectations. And despite being one to consider and a global industry leader, Intuitive Surgical has risks to take into account. Management’s warned of margin pressure on the back of US tariffs as well as a slight slowdown in procedure growth, potentially caused by rising competition.
Needless to say, if new market entrants are able to deliver a cheaper alternative to cash-strapped hospitals, Intuitive’s grip on the robotic surgery market might start to weaken. Nevertheless, I remain optimistic. And it goes to show that with the right businesses, a stock-picking strategy can potentially deliver superior returns.
The post If a 50-year-old puts £500 a month into the S&P 500, here’s what they could have by retirement appeared first on The Motley Fool UK.
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Zaven Boyrazian has positions in Intuitive Surgical. The Motley Fool UK has recommended Intuitive Surgical. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
