Please ensure Javascript is enabled for purposes of website accessibility

Why S&P 500 Index Funds Are a Retiree's Dream Investment

By Katie Brockman – Aug 1, 2020 at 6:45AM

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

One of the best ways to set yourself up for a comfortable retirement is to invest in an S&P 500 index fund.

As you're investing for retirement, you have seemingly endless options when it comes to where to put your money. There are countless stocks as well as a plethora of mutual funds to choose from, and all those choices can be daunting.

Fortunately, it may be easier than you think to choose the best stocks for retirement. S&P 500 index funds are among the safest and most reliable investments out there, but they can still pack a punch and help you build a robust retirement fund.

Gold figurines of bear and bull

Image source: Getty Images.

What is an S&P 500 index fund?

An index fund is a collection of securities that tracks an index, such as the S&P 500 or Dow Jones Industrial Average. An S&P 500 index fund tracks the performance of the companies within the S&P 500. You can't invest in the S&P 500 itself, but by investing in an index fund that mimics the index, your investments will follow its performance.

One of the main advantages of this type of investment is that it's incredibly easy to diversify your portfolio. The S&P 500 includes hundreds of the largest organizations in the country, and these companies span various industries from tech to agriculture to energy to healthcare.

By investing in a single S&P 500 index fund, you're investing in hundreds of diverse stocks at once, which significantly limits your risk. Because most of the companies in the S&P 500 are large corporations that have a proven track record of success, there's a good chance those stocks will perform well over the long run. Even if a few of those companies falter, it won't drag your entire portfolio down because your investments are so diversified.

The other advantage of S&P 500 index funds is that they're more likely to bounce back after a stock market downturn. Because it includes so many large companies across multiple sectors, the S&P 500 itself is a good representation of the market as a whole. So if the market takes a turn for the worse, the S&P 500 -- and your index fund -- will drop along with it. However, the market always bounces back from its downturns, meaning your index funds will recover as well.

For those who are saving for retirement, an S&P 500 index fund can be a powerful investment. By limiting your risk and protecting your investments as much as possible from market downturns, you're giving yourself the best shot at having enough savings to retire comfortably.

When an S&P 500 index fund may not be the best investment

There's no one-size-fits-all option when it comes to investing, so S&P 500 index funds won't be right for everyone. If you prefer to take a more hands-on approach to investing, you may opt to invest in individual stocks instead.

S&P 500 index funds are, by definition, average. They simply follow the market, so while you will likely see significant long-term gains if you invest consistently, you won't see explosive gains overnight. If the slow-but-steady approach isn't your cup of tea, investing in individual stocks may be the way to go. Of course, this approach often carries more risk, because you're putting your eggs into fewer baskets. It also requires more research on your part, because you'll need to ensure you're investing in solid companies that will perform well over the long run.

If you're up for the challenge, investing in individual stocks can potentially be a lucrative endeavor. But if you'd rather let the investment itself do most of the work for you, an S&P 500 index fund may be the best option.

The Motley Fool has a disclosure policy.

Invest Smarter with The Motley Fool

Join Over 1 Million Premium Members Receiving…

  • New Stock Picks Each Month
  • Detailed Analysis of Companies
  • Model Portfolios
  • Live Streaming During Market Hours
  • And Much More
Get Started Now

Related Articles

Motley Fool Returns

Motley Fool Stock Advisor

Market-beating stocks from our award-winning analyst team.

Stock Advisor Returns
356%
 
S&P 500 Returns
118%

Calculated by average return of all stock recommendations since inception of the Stock Advisor service in February of 2002. Returns as of 11/26/2022.

Discounted offers are only available to new members. Stock Advisor list price is $199 per year.

Premium Investing Services

Invest better with The Motley Fool. Get stock recommendations, portfolio guidance, and more from The Motley Fool's premium services.