No one, least of all his family, guessed that Ronald Read was building an $8 million fortune.
His clothes were so old that he used safety pins to hold them together. He chopped his own firewood well into his 90s. He drove a secondhand Toyota, and the biggest splurge he made in his life may have been the English muffin with peanut butter he always ordered at his local breakfast haunt. As a janitor and gas station attendant, he never drew a big salary.
But while he may not have been a big earner, Read was a big saver. His neighbor estimated that, for every $50 he earned, Read would invest $40 of it. Still, when his will revealed his net worth in 2014, his family was "tremendously surprised," as Read's stepson told the media.
So, how did the reclusive janitor, with no ties to Wall Street and no education beyond a high school diploma, build an $8 million fortune?
Harnessing 9,900% returns
Read, a World War II veteran, was likely at the peak of his earning and saving power from 1950 to 1990, a period in which the S&P 500 averaged annual returns of 11.9%, including dividends.
Image source: Getty Images.
Compounded year after year, that's enough to turn every $1 invested in 1950 into $100 and change, or a 9,900% return. While not the full story (Read held his investments until 2014) it illustrates just how powerful compounding can be over decades.
Now, Read didn't buy an index fund to track the S&P 500's rise. His portfolio was eclectic. His holdings included blue chip stalwarts such as Procter & Gamble, JPMorgan Chase, CVS, and Johnson & Johnson.
But while Read didn't buy an index fund, he may as well have. He invested in at least 95 companies, creating a highly diversified portfolio that you might expect to perform as well as the S&P 500 overall.
The Ronald Read route to riches (but easier)
Investors seeking to emulate Read's strategy might consider one shortcut: Buying a low-cost index fund that includes many entrenched industry leaders that are growing both earnings and dividends at a healthy clip.
By casting such a wide net, you will inevitably back some losers, as did Read, who held shares of Lehman Brothers before its collapse in 2008. But the power of this diversified approach is that winners, when compounding over decades, can deliver gains that more than make up for the duds.
Or, as Warren Buffett put it in a letter to Berkshire Hathaway shareholders, "The weeds wither away in significance as the flowers bloom."
For people who don't want to personally vet 95 different stocks, a fund to consider is the Vanguard S&P 500 ETF (VOO 0.28%).
NYSEMKT: VOO
Key Data Points
The fund is designed to closely track the S&P 500's returns, by investing in all 500 stocks in the index of America's 500 biggest companies.
So far, it's succeeded in its mission. Since its 2010 inception, it has achieved an average annual gain of 14.9%, compared to 14.94% for the S&P 500. And its extremely low expense ratio of just 0.03% means investors pay just three dollars in fees for every $10,000 invested. For context, the average fee for the industry is 0.74%.
Like every investment, the Vanguard S&P 500 ETF carries risks. If artificial intelligence (AI) valuation fears are well-founded, or if resurgent inflation prompts the Federal Reserve to reverse its recent interest rate cuts, then broader markets, and by extension the fund, may decline in the months ahead.
However, it's worth remembering that Read's investing lifetime included its share of disasters and looming specters, from the Cuban Missile Crisis to the stagflation nightmare of the 1970s, to the 2008-2009 financial crisis. Those headlines didn't hamper the fantastic long-term returns that made his $8 million portfolio possible. For investors seeking to apply the same principles, investing in the Vanguard S&P 500 ETF is a prudent choice.