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S&P 500 Trumps Donald Trump

Steve Pomeranz, Donald Trump

It seems the silly season is in full swing as presidential contenders jockey with each other to capture our attention in the media. So far, no one has done this better than Mr. Donald Trump. His net worth has been the subject of much speculation and light on facts, but Mr. Trump puts his numbers at $10 billion or more. Researching this point further, I came across an article by Karla Bowsher on Moneytalknews.com which took a more interesting tack, I thought. It calculated what he would be worth today if he had simply invested in the S&P 500 rather than followed his own investing ideas as a real estate magnate.

So here’s a little tidbit on him. Trump got a big head-start in life because his father Fred was a multimillionaire New York real estate developer—and, to give credit where it’s due, The Donald did grow what he inherited and created a fortune of his own.

But what if he’d simply stopped working 30 years ago and invested all his money in a simple S&P 500 Index fund? What would he be worth today?

At a high level, here are the numbers. Trump is estimated to be worth about $4.1 billion in the latest Forbes 400 list, which puts him in the No. 133 spot of the richest folks in America. But in a recent press release, The Donald says he’s worth about $10 billion. So fine, let’s give him the benefit of the doubt and assume his net worth is $10 billion.

Trump was also on the Forbes 400 list in 1982 when the magazine published its first annual list of America’s wealthiest citizens. That year, Forbes estimated Trump’s fortune at over $200 million but also acknowledged that Trump claimed it was $500 million. I guess there’s a pattern here, would you agree? So, again, let’s give Trump the benefit of the doubt and assume he was worth $500 million in 1982.

Now, if Trump had retired in 1982, sold his real estate holdings, and invested his $500 million in the S&P 500 Index, his money would have grown at an annualized rate of about 12% from 1982 through the end of 2014, assuming dividends were reinvested.

Considering that Donald Trump has not always been as shrewd as he’d have you believe—especially considering he’s filed four corporate bankruptcies since 1982—would he have been in better financial shape had he just sat back and put his money in a simple index fund? Would he have been worth more than the 10 Bill?

The answer in one minute.

More relevantly, can you do what he didn’t? Harness the twin tools of stocks investing and compound interest? Yes, you can.

While few of us have the resources to invest in each and every stock of 500 of America’s largest companies, nearly all of us have the ability to do so through mutual funds, like an S&P 500 index fund through plans such as your 401(k) or personal brokerage account.

If you decide to take on more risk and chase The Donald, you will need to make a couple of important decisions:

#1. Pick an asset class

You could buy stocks or bonds or choose from a slew of other alternative investments. But, to keep things simple, there’s nothing wrong with sticking with just stocks and bonds.

And many experts urge average investors to put their money in mutual funds rather than buy individual stocks and bonds because not everyone is equipped to truly analyze stocks and bonds. Instead, you’re better off choosing a stock mutual fund, a bond mutual fund, or a portfolio of mutual funds that includes both stocks and bonds.

But in the long run, stocks offer a greater rate of return than other asset classes such as bonds. Stocks have delivered average returns of 8 percent to 10 percent annually over the last 100 years, which is more than any other asset class. This higher return can simply be attributed to the fact that stocks entail greater risk than bonds and participate in the growth of the United States, which happens in fits and starts. It’s the reason stocks—over time—have had a higher return.

But, fortunately, mutual funds help mitigate risk because they are made up of a basket of stocks, which helps spread the risk. So if one company in your mutual fund goes bankrupt, it won’t wipe you out.

#2. Pick active or passive management

Actively managed stock mutual funds are run by financial professionals who decide which individual stocks within the fund to buy and sell. They make these judgments based on their expectations of future market performance and aim to outperform stock market indices…and charge higher fees for their efforts.

On the flip side, index funds are passively managed stock mutual funds and simply aim to mirror the performance of a stock market index. So owning an index fund is like owning the entire stock market. And because management is simple, fees charged are minimal and well below what active fund manager’s charge.

Moreover, it seems pretty clear, that in the long run, index funds have historically outperformed managed funds over a long period of time and at a considerably lower cost to investors.

Warren Buffett made headlines last year when he wrote in his annual letter to shareholders that his fortune is destined for index funds. Buffett wrote of the instructions laid out in his will: “My advice to the trustee could not be more simple: Put 10 percent of the cash in short-term government bonds and 90 percent in a very low-cost S&P 500 index fund. I believe the trust’s long-term results from this policy will be superior to those attained by most investors—whether pension funds, institutions, or individuals — who employ high-fee managers.”

Remember, however, he said long-term results. This is the key to the statement. Perhaps that wisdom is why Buffett is at the No. 2 spot on the Forbes 400.

So the takeaway is simple: Putting money into simple, low cost-index funds is a good way to invest for the long run, ride out market peaks and troughs, sleep peacefully, and have your portfolio deliver dependable returns for a happy, carefree retirement.

So how much would Trump’s fortune be worth if he had entered the stock market versus the real estate market since 1982?

An original investment of $500 million in the S&P 500 would have brought his fortune up to $20 billion versus the $10 billion he professes today. Figuring it out would take less than two minutes on the back of a napkin, and there would be no arguments between Mr. Trump and Forbes.