Investing in the stock market is one of the best ways to generate long-term wealth, and now that the market is booming, it's a fantastic time to buy.
Deciding where to invest, though, can be a daunting task. There are seemingly endless stocks and funds to choose from, and if you invest in the wrong places, you could easily lose more than you gain.
Fortunately, it's simpler than you might think to keep your money safer while still earning substantial gains over time. While everyone's investing preferences will differ depending on their goals and risk tolerance, there's one index fund that's perfect for beginners and requires next to no effort on your part.
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The best beginner-friendly investment
Whether you're brand new to the stock market or simply want a no-fuss investment that requires very little effort, an S&P 500 index fund could be a fantastic option.
An S&P 500 index fund is a collection of stocks bundled together into a single investment, and it aims to track the S&P 500 itself. This means that by investing in just one index fund, you'll instantly own a stake in all of the companies within the S&P 500 -- and your investment should mirror the performance of the index over time.
There are a few distinct advantages of the S&P 500 index fund that make it an especially smart choice for new investors:
- Instant diversification: Every S&P 500 index fund includes stocks from 500 of the largest and strongest companies in the U.S. from a wide variety of industries. This creates an instantly diversified portfolio with just one investment, which significantly cuts down on the time and effort you have to spend researching where to buy. If you're looking for a low-maintenance investment, this is about as straightforward as it gets.
- A-list collection of stocks: Because the companies listed in the S&P 500 are among the most robust in the world, this index fund is much safer than many other funds. While all stocks are subject to short-term volatility, healthy companies are far more likely to rebound and experience long-term growth.
- Outstanding long-term track record: The S&P 500 itself has a 100% success rate when it comes to recovering from crashes, recessions, and bear markets. In fact, analysts at Crestmont Research examined the index's long-term performance and found that every single 20-year period ended in positive total returns. This means that if you'd invested in an S&P 500 index fund at any point in history and simply held it for 20 years, you'd have made money.
The S&P 500 index fund can make for a great "set it and forget it" type of investment. It requires next to no upkeep, as you never need to choose individual stocks or worry about when to buy or sell. Simply invest consistently and stay invested through all the market's ups and downs, and you're nearly guaranteed to experience positive returns over decades.
How much could you earn with an S&P 500 index fund?
The market can be unpredictable in the short term, but over decades, the S&P 500 has been incredibly consistent. Historically, the market itself has earned an average rate of return of around 10% per year, meaning the annual highs and lows have averaged out to roughly 10% per year over several decades.
To play it safe, though, let's assume your investment only earns an average return of 7% per year going forward. At that rate, if you were to invest, say, $300 per month, here's approximately how much you could accumulate over time:
| Number of Years | Total Portfolio Value |
|---|---|
| 20 | $148,000 |
| 25 | $228,000 |
| 30 | $340,000 |
| 35 | $498,000 |
| 40 | $719,000 |
Data source: Author's calculations via investor.gov.
Increasing the amount you invest each month can help you earn more, but giving your money more time to grow will truly maximize your earnings. Getting started investing as soon as possible, then, is one of the best things you can do to earn as much as possible in the stock market.
One major downside to consider
Like all investments, the S&P 500 index fund has its drawbacks, too. Perhaps the biggest downside of this particular investment is that it can only earn average returns. Because it's designed to follow the market, it can't beat the market.
For many people, the ease and simplicity of this investment outweigh the average returns. You can still earn hundreds of thousands of dollars over time with an S&P 500 index fund. If you're willing to sacrifice greater potential earnings in exchange for a safer investment that requires very little effort, this may not be much of a downside for you.
On the other hand, if maximizing your earnings is a priority, investing in individual stocks may be a better option. This approach requires far more research and is more energy-intensive, as you'll need to study each stock you buy and keep tabs on industry trends. But with the right collection of stocks, you could earn substantially higher returns than you would with an S&P 500 index fund.
The right investment for you will depend primarily on your goals and the amount of effort you're willing or able to allocate to your portfolio. If you're looking for a simple, safe, and low-maintenance investment that is very likely to perform well over time, the S&P 500 index fund may be the perfect fit for you.
