I’m worried about the financial nihilism creeping into Gen Z Canadians. To be fair, the deck is stacked against them: housing costs are out of reach, employment markets are shaky, wages aren’t keeping pace with inflation, and student debt lingers for years.
But that’s no reason to throw up your hands and gamble on altcoins, penny stocks, or options. Too many people don’t realize just how powerful compounding can be in a tax-sheltered account when you simply earn the market average.
So, let’s look at a real-world historical example, using one of my favourite investments: Vanguard S&P 500 ETF (NYSEMKT: VOO).
Source: Getty Images
How compounding works
The S&P 500 is made up of 500 of the largest American companies across all 11 stock market sectors, and VOO tracks it passively. The index is weighted by market capitalization, which means the bigger a company grows, the more of it you own automatically.
This design makes the fund self-cleaning—winners rise to the top, laggards get left behind, and you don’t need to predict which companies will succeed ahead of time.
Over time, these 500 businesses will sell more products, deliver more services, acquire competitors, and generate growing profits. That value gets returned to investors either through quarterly dividends or share buybacks, both of which boost your returns.
Reinvested dividends in particular create a snowball effect: the shares you buy with your dividends generate more dividends in turn, and the cycle continues.
The evidence for investing
Don’t take it from me—look at the numbers. Over the past 15 years, a $10,000 investment in VOO grew to more than $80,000, while the same money left in cash barely reached $12,000. That’s the difference between a 701% cumulative return in the stock market versus just 23% in a savings account. The compound annual growth rate (CAGR) for VOO was nearly 15% versus just over 1% for cash.
Of course, this growth didn’t come free. VOO investors had to withstand volatility, including a maximum drawdown of -34% during the period. The second chart shows just how often stocks dip below previous highs. But for those who stayed invested, the long-term trend overwhelmingly rewarded patience.
The Foolish takeaway
The data makes one point crystal clear: the earlier and more consistently you invest, the greater the rewards of compounding. Even modest amounts, like $1,000, can snowball into a life-changing sum over decades when left to grow in a low-cost broad-market index ETF like VOO. You don’t need to pick stocks, time the market, or gamble on high-risk trades—just commit to buying steadily, reinvesting dividends, and letting time do the heavy lifting.
