How much could you make from investing your tax refund?
If you had invested your annual tax refund into Amazon, Apple, and Netflix over the past 10 years, this is how much would you have made.
Ah, spring. The days are getting longer, the leaves are returning to the trees, summer is just around the corner and, unfortunately, the IRS is knocking at your door.
When T.S Eliot wrote “April is the cruellest month”, he must surely have been talking about the yearly scramble to file your taxes.
Of course, there’s no way around it. Paying your taxes is just one of the terms and conditions of life in the US. But, apart from avoiding a stint in jail, all that pain is usually worth it in the end for one big reason:
Your tax refund!
According to the IRS, the average tax refund for a US worker has been roughly $3,000 per year over the past 10 years — a significant lump sum for the average worker. And looking at the findings of a recent survey by GoBankingRates, we can see that there is a wide variety of ways that people plan on spending this refund.
27% of respondents said that they would be using their tax return to pay off debt, which isn’t surprising considering that household debt in America is currently sitting at an all-time high of about $13.54 trillion, according to the Federal Reserve Bank of New York.
Beyond this, 10% of respondents said they would use their lump sum to fund a vacation or a luxury purchase, while 9% said they will make some other type of major purchase. Another 9% of those surveyed said that they intended to put their tax return into a savings account.
Everyone’s situation is different, and for many, the yearly tax refund is a great way to pay off debts that might be hanging over from the holidays. But for those that splurge with their tax refund — or even those that just leave it sitting in their bank account — there are much better ways to make the most from your tax refund.
What if you invested your tax refund?
We decided to do a little experiment.
We picked three of the most commonly purchased stocks from the past few years — Amazon, Apple, and Netflix — to see what the average worker would have earned if they had simply invested their tax returns into these companies over the past 10 years.
To do this, we created an imaginary investor named Andy. Since 2009, Andy has received the average tax refund of $3,000 per year. Because Andy is an organized person, he has filed his taxes as early as possible and already has his tax refund by February 13th.
On this date every year, Andy invests his refund in equal parts (made possible by fractional shares) into Amazon, Apple, and Netflix stock. Andy doesn’t wait for dips in the market or pay any attention to the latest news stories. He simply puts $1,000 into each company every year and waits.*
Not exactly ‘Wolf of Wall Street’ stuff.
So, after 10 years of this simple and consistent investing strategy, what has Andy’s total investment of $30,000 grown to?
Yes, you read that right. Andy has made more than $150,000 in returns on the principal amount invested by just investing the same amount of money into the same companies, every year.
Let’s put that into a little more context. What if Andy had put that $3,000 a year into a savings account, for example? Well, with an average interest rate of 0.09% on US savings accounts, he would be sitting on the much more conservative sum of about $33,176 after 10 years.
The thing is, you don’t even need to be an expert stock picker to have made the most out of your stock returns. Even if Andy had invested the $3,000 per year into the S&P 500 instead — which anyone can easily do with an ETF — he’d still be looking at a total figure of more than $47,950.
In other words, that’s an extra $17,250 for just investing in the US stock market rather than saving.
No wonder Warren Buffet calls index funds the thing “that makes the most sense practically all of the time.”
Have I missed the boat?
But surely it’s now too late to grab such bumper returns? Why didn’t we tell you this ten years ago!?
Well, the point of this exercise is not to show you what could have been, but instead to show you what could still be if you take advantage of the power of long-term investing.
You can argue that there were many things that Andy benefitted from in his investments like a protracted bull market and a trio of exceptionally good stock picks, and you’d be correct. But hindsight is a powerful bias.
Let’s not forget that, between May 2011 and July 2012, for example, Netflix stock plummeted by more than 80% to hit a low of under $8 a share.
Or what about that time in 2014 when Amazon stock lost almost 30% of its value?
Apple may be one of the biggest companies in the world, but its stock lost more than 40% between 2012 and 2013.
Sitting here now in 2019, these three companies look like great investments missed, but this disguises the fact that at various points over the last 10 years, they’ve all looked like bad investments for a period of time. The key to Andy’s success wasn’t finding the perfect time to invest in these stocks. It was having the temperament to weather short-term volatility in order to reap these massive rewards down the line.
There is immense power in the stock market that is just waiting to be unlocked. You don’t require a degree in finance or some complicated formula to pick the best time to invest. All you need is a fundamental belief in the companies you are investing in, some cash you want to get the most out of, and a few years ahead of you to let your investments grow.
The best time to start is right now. Remember, time in the market beats timing the market, every time.
Instead of spending your tax refund on a short-term spend or leaving it stagnant in a savings account, invest it in an ETF or selected basket of stocks (which you can find in the MyWallSt app) and get it working for you.
Believe us, your future self will thank you for it!
For our calculations, we assumed that the individual in question receives a tax return of $3,000 on February 13th of each year. The individual invests $1,000 into each stock — Amazon, Apple and Netflix — at the earliest opportunity (i.e, the opening price on first-day the market is open closest to that date). The individual buys fractional shares. The total sum is the value of the portfolio on February 13th, 2019, less assumed trading fees. Fees are assumed at $10 per trade. Figures do not take into account any dividends (Apple resumed paying dividends in 2012).