Some people become millionaires by spotting the next Apple (NASDAQ:AAPL) or Amazon (NASDAQ:AMZN) early on. Or they take major risks on speculative investments and are lucky enough to come out on the winning side.
But you don't need to be an expert stock picker or a big risk taker to become a millionaire. There's an effortless way to build wealth, even if you're not a savvy investor. Read on to learn why an S&P 500 index fund is the only investment you need to become a millionaire.
How the S&P 500 can make you millions
When you invest in the S&P 500 index, you're not just getting one single investment. You're investing across 500 companies in the U.S. with a history of delivering profits that represent more than 80% of the domestic stock market.
With a single investment, you become an investor in some of the biggest names in the stock market, including Apple, Amazon, Facebook (NASDAQ:FB), Visa (NYSE:V), Walt Disney (NYSE:DIS), Tesla (NASDAQ:TSLA), and Johnson & Johnson (NYSE:JNJ). Because you're investing across so many companies that span every stock market sector, you get automatic diversification.
Historically, the index has delivered average returns of about 10%. Of course, some years the index has dropped or delivered less-than-stellar returns. But the most important thing you need to know is that in the past 100 years, you would have never lost money investing in the index over a 20-year period.
Had you invested $500 a month consistently in the S&P 500 over the past 30 years, you'd have just over $1 million. Your principal investment? Just $180,000. If you'd started investing the same amount 40 years ago, you'd have a whopping $3.3 million -- all on a $240,500 investment.
How do you invest in the S&P 500 index?
You can't invest directly in the S&P 500 or any stock index. Instead, you invest in an index fund that attempts to replicate its performance as closely as possible. Here are three of the top S&P 500 funds.
|Fund||Expense ratio||Fund assets|
|Vanguard S&P 500 ETF (NYSEMKT:VOO)||0.03%||$805.4 billion|
|iShares Core S&P 500 ETF (NYSEMKT:IVV)||0.03%||$290 billion|
|SPDR S&P 500 ETF Trust (NYSEMKT:SPY)||0.09%||$392.4 billion|
All three funds are exchange-traded funds, or ETFs, which are bought and sold on exchanges, exactly the same way individual stocks are traded. The beauty of each of these S&P 500 funds is that each has an extraordinarily low expense ratio, which is the amount that goes toward investment fees. A 0.03% expense ratio means that a $10,000 investment will cost you just $3 in fees, while the remaining $9,997 gets invested.
While each of the funds listed above is a great option if you want to grow your money to millions, there's no need to invest in all three. They all invest in the same 500 stocks, so you'd essentially be buying the same investment.
Does that mean you shouldn't pick your own stocks?
Investing in individual stocks has the potential to boost your returns even further, provided that you're willing to put in the time to research stocks. But if you lack the time or knowledge to do so, the S&P 500 index is the only investment you need to reach millionaire status.
Even if you're skilled at picking stocks, an S&P 500 index fund works well as the core of an investment portfolio. That way, you lock in the returns the stock market produces over time. Then, you can layer on individual stocks when you see value or growth potential.
If you want to become an S&P 500 millionaire, just don't expect it to happen overnight. Those big returns come from allowing your money to compound over long periods of time. But with patience and consistent investing, the S&P 500 is all you need to become a millionaire retiree.