Question

Time Value of Money Part 1: The Vanguard 500 (ticker: VFINX) is an index mutual fund that invests in the Standard & Poor's 500 (500 largest US public companies). On June 19, 2020 a share in this fund cost $287.20. Ten years ago, this same fund's share price was $99.60. Calculate the annual compounded return on this fund over that 10 year period. Part 2: Assuming the average annual compounded return you calculated above for the last 10 years, estimate what the Vanguard 500 share price will be 10 years in the future (June, 2030). Part 3: Do you think this future value is realistic or not? Why? Do you think this would be a reasonable personal investment to make, yes or no, and why? In terms of investing for the future, what other issues or considerations do you think are relevant?

Answer 1

a) Value of Mutual Fund ten years ago =99.60
Value of Mutual Funds today =287.20
Rate =(Value of today/Value 10 years ago)^(1/n)-1 =(287.20/99.60)^(1/10)-1 =11.1713% or 11.17%

Part 2) Value in future 10 years =Value today*(1+r)^n =287.20*(1+11.1713%)^10 =828.15

Part 3) No, I dont think future value is realistic because historical growth percentage is used to estimate future growth rate which might not be correct.No, I don't think this would be a reasonable investment as future growth rate might be less. Assuming future growth rate to be same as past might be misleading.

Other factors to be considered while investing are
1. inflation:- Inflation reduces the real value of return.Higher inflation in future would reduce the affect of the growth.
2. Economic Condition: Prediction of recession in future will certainly reduce the growth rate in future.