Imagine this: You wake up one day to find a letter in the mail. One of your distant relatives had robbed an Egyptian pharaoh’s tomb. There’s no official record of your ancestor’s crime or wealth. But a secret organization now deems you the heir. Best of all, the windfall is a cool $2 billion, and it’s completely tax- free. This would put you near the bottom of the Forbes 400 list.
Every year, Forbes grabs the world’s attention by listing the 400 richest people in the United States. The names of the richest, however, aren’t engraved in stone. Much like matches to papyrus, fortunes often go up in smoke.
The Forbes 400 includes savvy entrepreneurs, rich descendants and great investors. If you’ve inherited enough to make the cut, you might wonder if a portfolio of index funds could keep you on the list. Plenty of people might say no. But I’m not so sure.
In 1982, Forbes compiled its list for the very first time. Armas Clifford “Mike” Markkula Jr. was the poorest member of the group. As Apple’s first CEO, he was worth $91 million. Today, the 77 year-old is still worth a fortune. But he isn’t wealthy enough to make the Forbes 400.
According to Niall J. Gannon, author of Tailored Wealth Management, to maintain a place on the Forbes 400 list from 1982 to 2017, original members would have needed to grow their wealth by 8.94 percent per year. That’s an impressive rate of return–and most of the members fell short. But over that same time period, the S&P 500 averaged a compound annual return of 11.30 percent.
Mike Markkula Jr. was worth $91 million in 1982. If he had invested $60 million of his $91 million fortune in the S&P 500, it would have been worth $2.83 billion by December 31, 2017. In that case, he would have risen up the ranks of the Forbes 400 list. Mr. Markkula, however, probably doesn’t care–and nor should he. With an estimated net worth above $1 billion, I doubt he’s losing sleep.
But this does shed light on the power of index funds. Over the 20-year period ending December 31, 2017, it took an annual compound return of 7.78 percent to remain on the Forbes 400 list. During that same time period, Vanguard’s S&P 500 index gained a compound annual return of 8.21 percent. DFA’s U.S. Large Cap Value Fund averaged a compound annual return of 9.65 percent.
It’s easy to downplay the power of index funds. But most people shouldn’t. For example, in 1982, Forbes listed Donald Trump’s net worth at $100 million. His net worth, in March 2019, was estimated at $3.1 billion.
If, in 1982, he had invested that $100 million in the S&P 500, he could have followed the 4 percent rule. That means he could have withdrawn an inflation adjusted 4 percent of his portfolio every year–and never worked again. Obviously, this didn’t align with his ambition, but roll with this for a moment.
According to portfoliovisualizer.com, over the following 37 years, he could have withdrawn about $270 million from his original $100 million portfolio. And he would still have money left. In fact, he would have about $3.17 billion today. According to Forbes, that’s more than he has now.
To be fair, this doesn’t account for taxes. But the overall premise still rings true. Low-cost index funds, coupled with time in the market, are powerful indeed. They might help you build or maintain your wealth– even without a grave robber lurking in the family tree.