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A Simple Way to Get Rich Slowly but Steadily

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So here’s an interesting question from me: Do you believe you can amass a million dollars in wealth with a daily investment of just $36? Turns out, that might just be the case if you were to invest in an index tracker patiently (the word has to be stressed because we’re talking about investing timeframes of decades here!) and diligently over the long term.

An index tracker simply mimics a share market index. In Singapore, the most well-known share market index would have to be the Straits Times Index (SGX: ^STI), which consists of 30 of some of Singapore’s largest companies; these companies include household names like DBS Group Holdings Ltd (SGX: D05), Singapore Telecommunications Limited (SGX: Z74), and Oversea-Chinese Banking Corp. Limited (SGX: O39).

From April 2002 to July 2014, the STI had achieved a compounded annualised return of 5.53%. Bear in mind though, that these 12-plus years saw an avalanche of domestic and international crises. Some include the SARS crisis in 2003; the Indian ocean earthquake in 2004 which set off a massive tsunami in Indonesia; the 2007-2009 Global Financial Crisis; the 2010 bail out of a number of European nations including Greece and Ireland; and more recently, the stare down between Russia and Ukraine which started in February this year.

There are two exchange-traded funds here which tracks the STI and one of them is the SPDR STI ETF (SGX: ES3). These ETFs are the closest things an investor can get to investing directly into the STI.

For the same period as above (April 2002 to July 2014), the SPDR STI ETF produced returns of 8.65% per annum with dividends reinvested. After accounting for an average inflation of 2.8% historically, the annualised real returns would therefore be 5.85%.

Now here’s the magical bit. Assuming a compounded annualised return of just 5.85%, if you were to invest S$36.07 a day (without factoring in commissions), every day, for the next 30 years, you would be rewarded with…. a cool million Singapore dollars at the end of it. Even with a more conservative return of 5% per annum, you would need to set aside just S$41.84 per day and dollar cost average into the investment to amass the same S$1 million. Assuming you save up $36 a day for a year and invest that amount annually with commissions of S$50 per trade, you would still end up with more than S$1 million.

You might wonder how small dollops of approximately S$36 a day can bring you the riches. For that, we have to turn to Albert Einstein. He once said that compound interest is the Eighth Wonder of the world and that “He who understands it, earns it… he who doesn’t, pays it.”

Just like how small droplets of water falling into a pail from a tap can turn an empty and light pail into a heavy one, compound interest allows one to accrue wealth slowly but surely.

In the past 200 years, the S&P 500, a broad share market index in the USA, rose in 134 of those years (that’s 71% of the time!) and finished the year with a return between -10% and 20% more than half the time.

Even though the STI in Singapore does not have such a long history, it’s still a general trend to see the share market rise more than they fall. This is due to inflation, population growth and changes in the index itself where companies that are not doing well get kicked out of the index to be replaced by another firm.

Foolish Bottom Line

As scary as bad times are, one can still do decently well by staying invested for the long-term and through those bad times. When there’s blood on the streets, like during the Great Financial Crisis in 2007-2009, the STI was trading at below 6 times its historical earnings. Currently, the index’s valuation has recovered and it is going for a PE ratio of around 14.

The next 30 years will see lots of booms and busts but staying disciplined in investing regularly and having patience are the keys to riches. Lots of studies have shown that timing the market is futile anyway.

Though my example of becoming a millionaire by investing $36 a day is just a hypothetical look into the future, it’s also meant to serve as a reminder that becoming a millionaire is not as difficult we imagine it to be. All we need is the discipline and patience to invest diligently for the long-term despite all the troubles in the world.

For more about long-term investing, sign up now for a FREE subscription to The Motley Fool's weekly investing newsletter, Take Stock Singapore. Written by David Kuo, Take Stock Singapore also tells you exactly what's happening in today's markets, and shows how you can grow your wealth in the years ahead.

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The information provided is for general information purposes only and is not intended to be personalised investment or financial advice. Motley Fool Singapore contributor Sudhan P doesn’t own shares in any companies mentioned.