Donald Trump traveled an old-fashioned route to fortune.
As he explained when he announced his bid for the 2016 Republican nomination for president:
“I made it the old-fashioned way. It’s real estate. You know, it’s real estate.”
While Trump did have a big head start — his father, Fred, was a multimillionaire New York real estate developer — there’s no doubt The Donald has created a fortune of his own. But if he’d stopped working 30 years ago, he could have done much better.
All he had to do was shift away from real estate and park his money in the same place that you can: an unmanaged stock index fund.
To compare Trump’s performance to that of an unmanaged index fund, we need to know two things: his beginning net worth and his current net worth.
There’s considerable debate about Trump’s net worth. It’s estimated at $4.1 billion in the latest “Forbes 400” list, which puts him in the No. 133 spot of the richest folks in America. However, in July, he issued a press release announcing his net worth at $10 billion.
Fine. Let’s give him the benefit of the doubt and assume his net worth is $10 billion.
Now we need to establish his net worth at some point in the past.
Trump was on the Forbes 400 in 1982, when the magazine published its first annual list of America’s wealthiest denizens.
That year, Forbes said Trump’s fortune was “estimated at over $200 million,” but also acknowledged that Trump claimed it was “$500 million,” according to Timothy L. O’Brien’s book “TrumpNation: The Art of Being The Donald.”
Again, let’s give Trump the benefit of the doubt and assume he was worth $500 million in 1982.
Imagine Trump had retired in 1982, sold his real estate holdings and invested his $500 million in the S&P 500 — that is, 500 stocks representing the American stock market.
From 1982 through the end of 2014, the S&P 500 index had an annualized return, including reinvested dividends, of 11.86 percent, according to MoneyChimp’s S&P 500 Compound Annual Growth Rate calculator.
Per this calculator, every dollar invested in January 1982 would have been worth $40 by December of 2014. That means Trump’s initial $500 million would have grown to $20 billion. That’s twice what Trump says he’s worth today.
You can beat The Donald
This comparison is notable for two reasons. First, it reveals that Trump may not always be as shrewd as he’d have you believe, especially considering he’s filed four corporate bankruptcies since 1982.
More relevant to your life, however, is that you can do what he didn’t: harness the twin tools of stocks and compound interest.
While few of us have the resources to invest in the stocks 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.
You probably have an S&P index fund, or something similar, in your 401(k) at work. They also can be found at nearly every investment firm, either as a mutual fund or an exchange traded fund, commonly known as an ETF.
If you decide to take on more risk and chase The Donald, you will need to make a couple of important decisions: