Buying stocks and building a portfolio of top-quality companies can be a great way to build wealth over time, but it isn't the only way to go. Quite frankly, buying individual stocks isn't right for everyone. Many people simply don't want to have to do investment research or depend on any one company for their investment performance.
And even if you do invest in individual stocks (which we're obviously big fans of doing), that doesn't mean that you should only buy individual stocks. Even for the most committed stock investors, index funds can be a great way to create a nice "base" to your portfolio.
If you aren't familiar, an index fund is a type of investment that pools investors' money to attempt to match the performance of a certain stock index. For example, an S&P 500 index fund would invest in the 500 stocks that make up that index, with the goal of matching the S&P 500's performance over time.
Index funds may be a hands-off way to invest but can still produce excellent returns over the long run. How excellent? You might be surprised.
Image source: Getty Images.
How to become a millionaire with index funds
Becoming a millionaire with index fund investing is a simple three-step process:
- Identify some low-cost index funds. The Vanguard S&P 500 ETF (VOO -0.41%) is one that all investors should know about, and a couple other favorites of mine are the Vanguard Russell 2000 Value ETF (VTWV -0.71%) and the Invesco QQQ Trust (QQQ -0.48%), which allows investors to get exposure to the tech-heavy Nasdaq stock exchange. However, it's important to note that there are dozens of excellent low-cost ETFs that could be great fits for you.
- Periodically add to your index funds over time.
- Wait a while. Index funds can put your investments on auto-pilot and build an impressive nest egg.
Consider this example. While the S&P 500 fluctuates quite a bit in the short term, it actually delivers pretty consistent performance over the long run. Over time, the S&P has produced total returns of 9%-10% for investors.
So, let's say that you invest $100 per week in an S&P 500 index fund like the Vanguard example I mentioned earlier. Based on an annualized return of 9%, how much do you think your investment could grow to over time? Would you believe that within 35 years, you'd likely have a million-dollar investment portfolio?
|
Time Period |
$100 Weekly Investment Compounded at 9% Per Year |
|---|---|
|
5 years |
$31,121 |
|
10 years |
$79,003 |
|
15 years |
$152,677 |
|
20 years |
$266,033 |
|
30 years |
$708,799 |
|
40 years |
$1,756,989 |
Data source: Author's own calculations.
Is it possible to retire a millionaire with index funds? Not only is it possible, but if you start early and invest regularly, it's likely.
No extraordinary steps needed
Billionaire investor Warren Buffett has said that low-cost index funds are the best investment most people can make. As Buffett said, "If you invested in a very low cost index fund -- where you don't put the money in at one time, but average in over 10 years -- you'll do better than 90% of people who start investing at the same time."
Sure, if you have the time and desire to learn how to research and evaluate stocks, and to apply that knowledge to finding great investments, do it. At The Motley Fool, we make no secret that we believe beating the market is entirely possible with a smart investment strategy.
